Using Financial Data to Identity Changes in Bank Condition

The 1980s have been characterized by record post-Depression bank failure rates, a record number of banks on the Federal Deposit Insurance Corporation's (FDIC's) problem bank list, and record losses to the FDIC in terms of total dollar losses and losses per dollar of failed bank assets. Moreover, as the cost and complexity of examining banks have risen it has become increasingly more difficult for the bank regulators to attract and retain quality bank examiners. On the other hand, advances in computer technology give bank regulators the ability to monitor the condition of banks without conducting an on-site examination. Therefore, off-site monitoring of banks has become an important part of the regulatory examination umbrella. Off-site monitoring tracks the condition of banks using the quarterly call report balance sheet and income statement data.' Banking regulators use these early-warning systems to complement on-site examination and as a way to allocate scarce examination resources. When offsite monitoring indicates a deterioration of a bank's financial health, an on-site exam can then be conducted.