US bank regulators finalize rule defining 'unsafe or unsound' practices

Overview

Updated Aug 27

For 60 years, the phrase 'unsafe or unsound practice' gave bank regulators enormous power and no formal definition. On August 27, the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) finalized one for the first time since the standard was created in 1966.

The rule defines what counts under Section 8 of the Federal Deposit Insurance Act, the statute that lets regulators issue cease-and-desist orders, remove officers, and impose civil penalties. A practice qualifies only if it is likely to materially harm a bank's financial condition or present a material risk of loss to the Deposit Insurance Fund. Process failures no longer qualify on their own, and the Federal Reserve, which supervises many of the nation's largest banks, has not joined.

Why it matters

The rule changes which bank behaviors trigger penalties. Process failures that once drew formal enforcement now fall outside regulators' reach unless they threaten material financial harm.

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Key Indicators

2 of 3

Federal banking agencies party to the rule

The OCC and FDIC finalized the rule; the Federal Reserve has not joined.

60 days

Time until the rule takes effect

The rule becomes effective 60 days after publication in the Federal Register.

1966

Year the unsafe-or-unsound standard was created

Congress created the standard in the Financial Institutions Supervisory Act; this is its first formal definition.

Voices

Curated perspectives — historical figures and your fellow readers.

Ever wondered what historical figures would say about today's headlines?

Organizations Involved

Office of the Comptroller of the Currency

Federal banking regulator

Co-issued the final rule

The OCC charters, regulates, and supervises national banks and federal savings associations.

Federal Deposit Insurance Corporation

Federal banking regulator and deposit insurer

Co-issued the final rule

The FDIC insures deposits and supervises state-chartered banks that are not Federal Reserve members.

Board of Governors of the Federal Reserve System

Central Bank

Not party to the rule; has not proposed a parallel definition

The Federal Reserve supervises state-chartered member banks and bank holding companies.

Timeline

October 2025 August 2026

2 events Latest: August 27th, 2026 · 2 weeks ago

August 2026
OCC and FDIC finalize 'unsafe or unsound' practices rule
Latest Rule Change

Final rule sets risk-based definition, overhauls Matters Requiring Attention, and adds 'supervisory observations' framework.
August 27th, 2026
October 2025
OCC and FDIC propose defining 'unsafe or unsound' practices
Proposal

The agencies issue a joint notice of proposed rulemaking defining the term for Section 8 enforcement and revising the MRA framework.
October 30th, 2025

Scenarios

Federal Reserve adopts parallel rule

Possible Resolves by Q2 2027

Discussed by: MLex and industry analysts covering the supervision overhaul

The Federal Reserve faces pressure from the same administration to align its supervisory framework with the OCC-FDIC rule. If it adopts a comparable definition and a similar standard for Matters Requiring Attention, bank supervision becomes uniform across agencies. If it stays out, Fed-supervised banks face a stricter, more discretionary standard than their OCC-regulated peers.

Legal challenge seeks to block the rule

Possible Resolves by Q3 2027

Discussed by: Consumer advocacy groups and administrative law observers

Critics may argue the rule weakens the deposit insurance safety net by narrowing what counts as an unsafe or unsound practice. A challenge would likely be filed in the U.S. District Court for the District of Columbia, seeking an injunction, stay, or vacatur.

Enforcement actions decline as process issues fall out of scope

Likely Resolves by End of 2027

Discussed by: Banking industry trade groups and former examiners

With the higher materiality threshold, examiners shift process-related findings to informal 'supervisory observations' and issue fewer formal Matters Requiring Attention. Section 8 enforcement actions tied to documentation or risk-management process failures become less common.

Historical Context

3 moments from history that rhyme with this story — and how they unfolded.

October 1966

Financial Institutions Supervisory Act (1966)

Congress gave federal banking agencies cease-and-desist powers, officer removal authority, and civil money penalties, all based on 'unsafe or unsound practices.' The term was deliberately left undefined to preserve flexibility.

Then

Regulators used the broad standard to police everything from embezzlement to lax risk management.

Now

For six decades, the ambiguity gave examiners wide discretion and made enforcement outcomes hard to predict.

Why this matters now

Today's rule is the first formal definition of that 1966 standard, replacing discretion with a specific, risk-based test.

December 1991

Prompt Corrective Action (1991)

After the savings and loan crisis, Congress required regulators to apply objective capital thresholds that automatically trigger progressively stricter actions as a bank's capital declines.

Then

Regulatory responses became predictable and rules-based rather than discretionary.

Now

PCA remains the framework for capital-based supervision, showing how defined triggers can replace ad hoc judgment.

Why this matters now

Like PCA, today's rule replaces a vague standard with a defined test. Where PCA added automatic triggers to catch problems earlier, this rule raises the bar for what counts as an actionable practice.

May 2020

Community Reinvestment Act rule (2020)

The OCC and FDIC jointly finalized a rule modernizing Community Reinvestment Act evaluation criteria, while the Federal Reserve declined to join and issued its own separate proposal instead.

Then

Banks faced two competing CRA frameworks depending on their charter.

Now

The 2020 rule was later superseded by a joint 2023 rule, showing how agency splits get resolved over time.

Why this matters now

Mirrors today's split, where OCC and FDIC act together while the Federal Reserve stays out. The eventual 2023 unified rule shows how agency splits tend to resolve.