US banking supervisors in the past focused primarily on validating bank balance sheets, particularly the value of loan portfolios, as of a specific point in time. Losses on banks’ loan portfolios historically have been the principal source of their financial problems. Concentrating on the quality of banks’ loans and the adequacy of their reserves was, and continues to be, essential to sound banking supervision.
As part of the examination process, examiners reviewed the soundness of management practices, internal controls, and internal audit activities, but that review was not the examination’s primary focus. The Federal Reserve’s adoption of a risk-focused approach, however, reflects its view that examiners should target their work on individual banks’ specific risk profiles, including the traditional examination of loan quality and reserves.