The phrase bank examiners have used since 1966 now has a definition, and it is narrower than the one the courts wrote

Congress wrote the phrase into the Federal Deposit Insurance Act and never defined it. For sixty years the working definition came from a memorandum a savings regulator submitted to a congressional hearing in 1966, which courts adopted and examiners applied.

That ends. The Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation filed a joint final rule on Monday morning defining "unsafe or unsound practice" by regulation, for the first time, and rewriting the standard for the supervisory findings examiners hand banks between enforcement actions. The rule takes effect 60 days after publication, which is scheduled for September 1. The Federal Reserve is not a party to it.

The new test

A practice, act or failure to act is unsafe or unsound if it is contrary to generally accepted standards of prudent operation and, if continued, is likely to materially harm the institution's financial condition or present a material risk of loss to the Deposit Insurance Fund, or has already materially harmed it. Harm to financial condition is defined too, and the definition is a list: capital, asset quality, earnings, liquidity, sensitivity to market risk.

The 1966 formulation the courts adopted reached further. It covered any action or inaction contrary to prudent operation whose possible consequences, if continued, "would be abnormal risk or loss or damage to an institution, its shareholders" or the insurance funds. Possible consequences becomes likely material financial harm. Shareholders drop out.

Matters requiring attention get a parallel test with a slightly lower bar, could reasonably be expected to rather than is likely to, plus a second route: an actual violation of a banking law or regulation.

What examiners may still say, and what it now means

Anything below that line becomes a supervisory observation, which the rule defines and then strips of consequence. A supervisory observation creates no requirement, no expectation that it goes to the board, and no expectation that the bank does anything about it. A footnote in the impact analysis adds that examiners are prohibited from tracking a bank's voluntary implementation of changes made in response to one, outside ordinary examination recordkeeping.

Below that again sits a new category the proposal did not contain. An actual violation of law that the agency chooses not to make an enforcement action or an MRA is an "other violation", and for those the agencies may direct remediation and do whatever else the law requires, and nothing more.

Two changes from what was proposed

The agencies took 36 comments on the October 2025 proposal and made two substantive changes.

The first is that individuals are out. The proposed definition would have applied to institution-affiliated parties as well as institutions, and the agencies concluded that tying an individual's misconduct to material harm at the institution would let the same conduct be actionable at a small bank and not at a large one. Their example is direct: a person could underwrite loans badly at a large institution with no recourse available, then move to a smaller one and do it again. Enforcement against individuals stays on the old standards.

The second is the "other violations" category described above.

The arithmetic the agencies put on it

The OCC supervises 986 institutions and expects to issue fewer MRAs and bring fewer enforcement actions on unsafe or unsound practice grounds. It puts the direct annual saving to banks at likely more than $100m, and the cost it is measuring is consultants: $300 to $1,200 an hour at top tier firms, $150 to $300 at lower tier ones, $250 to $550 for financial advisory work. The FDIC side of the analysis says all 2,700 of its supervised insured depository institutions could be affected, and that the only entity the rule directly obliges to do anything is the FDIC itself.

One related piece is deliberately unfinished. The agencies note that the Federal Financial Institutions Examination Council proposed changes to the CAMELS rating system on May 19, and say that moving their own rating processes while that sits open would be premature.