As two of the federal banking agencies prepare to define “unsafe or unsound practices” through rulemaking for the first time,[1] a critical question emerges: what does the underlying statute require for a practice to be unsafe or unsound? While the agencies can and should clarify that meaning through rulemaking, they are nonetheless bound by the statute and the case law interpreting it.
This note looks to three sources that establish the meaning of “unsafe or unsound practices”: (1) the statutory text itself, (2) binding case law and (3) the legislative history of the 1966 law that codified this standard. Together, these sources point to a clear legal definition: a practice is only “unsafe or unsound” if (1) it departs from generally accepted standards of prudent operation and (2) is more likely than not to pose a threat to the financial integrity or stability of the institution. The agencies’ recent proposal is generally consistent with that reading.
What the Text Says
Section 8 does not define “unsafe or unsound practices,” but dictionary definitions from 1966 (when Congress codified this authority) show that the terms “unsafe” and “unsound” describe conditions that pose a threat to the stability or health of a system as a whole, not minor issues. The adjectives used (“insecure,” “not healthy or whole,” “diseased,” “decayed or impaired”) describe serious threats, not minor issues.[2]
The statutory text also indicates that any alleged threat to an institution’s financial integrity must be more likely than not to materialize. Section 8 explicitly limits the agencies’ authority to correcting conditions “resulting from” an unsafe or unsound practice, suggesting Congress would not have expected enforcement based on unlikely or unforeseeable risks.
Further, enactment of Section 8 drew on decades of federal practice and over a century of state practice that informed Congress’s understanding of the “unsafe or unsound” standard. Congress legislates against the backdrop of existing law.[3] Before 1966, “unsafe or unsound” language appeared in the banking laws of 38 states.
State laws using these terms date back to the “free banking” era of the 1830s and 1840s, when states developed laws to prevent widespread bank failures. These early statutes demonstrate that concerns over serious threats to banks’ financial stability animated the standard. For example, New Hampshire’s 1837 statute addressed whether a bank’s continued operation would be “unsafe or hazardous to the public interest.”[4] As another example, New York’s 1847 statute focused on whether the bank was “in an unsound or unsafe condition to do banking business.”[5] When New York’s highest court applied this statute in 1897, it found a bank to be “in an unsound and unsafe condition” because it was insolvent—its capital was exhausted with a $260,000 deficiency.[6] Wisconsin’s Supreme Court recognized in the 1930s that technical violations alone don’t meet the high bar established by the unsafe or unsound practices standard.[7] According to the court, the idea “[t]hat a reserve below the legal limit itself renders a bank unsafe and unsound” was “fallacious” without some demonstration of likely material financial harm.[8]
Federal application of the standard before 1966 reflected the same understanding.[9] During deliberations on the 1966 law which provided the agencies with authority to take enforcement actions against institutions that have engaged in an “unsafe or unsound practice,” the Senate Banking Committee entered into the Congressional Record the “Horne Memorandum.”[10] The Horne Memorandum listed specific cases involving severe financial mismanagement: hazardous lending resulting in bankruptcy, loans made without regard for borrower financial responsibility, and payments benefitting the bank’s own chairman.[11]
Congress incorporated this pre-existing understanding of the term “unsafe or unsound practices,” as it existed under state law and federal agency practice, when it passed the 1966 law.[12]
What the Courts Have Said
A majority of federal courts of appeal have held that a practice is only “unsafe or unsound” if it departs from generally accepted standards of prudent operation and poses a likely threat to the institution’s “financial stability” or “financial integrity.”
The D.C. Circuit—whose decisions effectively bind the agencies because all final enforcement orders are appealable there[13]—has held that the provision “refers only to practices that threaten the financial integrity of the institution.”[14] The Fifth Circuit’s Gulf Federal decision similarly emphasized that an unsafe or unsound practice must have a “reasonably direct effect on an institution’s financial soundness.”[15] In that case, a federal banking agency claimed that a technical contract breach that did not impose material financial harm but did create “reputation risk” and a potential loss of public confidence constituted unsafe or unsound practices. The court rejected this reading, explaining that the risks bore only a “remote relationship to Gulf Federal’s financial integrity.”[16]
The court then explained why granting agencies unfettered discretion would undermine the rule of law:
Approving intervention under the [agency’s] ‘loss of public confidence’ rationale would result in open-ended supervision. . . . The [agency’s] rationale would permit it to decide, not that the public has lost confidence in Gulf Federal’s financial soundness, but that the public may lose confidence in the fairness of the association’s contracts with its customers. If the [agency] can act to enforce the public’s standard of fairness in interpreting contracts, the [agency] becomes the monitor of every activity of the association in its role of proctor for public opinion. This departs entirely from the congressional concept of acting to preserve the financial integrity of its members.[17]
The approach taken by a minority of federal courts of appeal is nearly identical. The only difference is that those courts require that the practice create an “abnormal” risk or loss to the financial institution, rather than a risk that is likely to threaten the “financial integrity” of the institution.[18] With that said, an abnormal risk still represents a significant level of risk or loss.[19]
The agencies are bound by these judicial precedents. Following the Supreme Court’s 2024 decision in Loper Bright, which overruled Chevron deference to agency interpretations of ambiguous statutes, and the related case Brand X, agencies may not overrule a court’s past interpretation.[20] Courts have already determined the best reading of “unsafe or unsound practices” over several decades. Therefore, the agencies must adhere to the courts’ interpretation.
What Congress Intended
Where the meaning of the statutory text is plain and where the courts have already determined its best reading, the legal analysis is complete.[21] The legislative history in this case is consistent with the plain meaning. Congress understood the term “unsafe or unsound practices” to prohibit only departures from generally accepted standards of prudent operation that are more likely than not to pose a threat to an institution’s financial integrity or stability. Indeed, the House Banking Committee Chair endorsed this view, noting that enforcement authority “related strictly to the insurance risk and to assure the public of sound banking facilities.”[22]
As previously noted, one of the key pieces of the Congressional Record included during deliberations on the 1966 law was the Horne Memorandum.[23] As such, the Horne Memorandum provides helpful insight on how Congress understood the meaning of the term “unsafe or unsound practice.” It stated:
Generally speaking, an “unsafe or unsound practice” embraces any action, or lack of action, which is contrary to generally accepted standards of prudent operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to an institution, its shareholders, or the agencies administering the insurance funds.[24]
The memorandum offered specific examples—each involving serious financial mismanagement, such as making loans without regard for borrower financial responsibility or engaging in hazardous lending resulting in default.[25] Critically, the Horne Memorandum made clear that the agencies have the burden to establish through “a factual showing on the record” in each case that a particular practice is “unsafe or unsound.”[26]
What This Means for the Proposed Rule
The plain language and case law are clear. In recent decades, however, the agencies strayed from this meaning. The agencies’ recent proposal correctly offers a definition of “unsafe or unsound practices” that aligns regulatory practice with the statutory text and binding judicial interpretations.
The definition of “unsafe or unsound practices” should:
- Focus on financial integrity: The agencies should revise the proposal to require that the harm must present a threat to the financial integrity or stability of the institution.
- Require departure from accepted banking standards: The agencies should adopt as proposed the requirement that conduct must violate generally accepted standards of prudent banking operation, not merely examiner preferences or agency guidance.
- Establish reasonable foreseeability: The agencies should adopt as proposed the requirement that a practice must be “likely” to result in material financial harm, consistent with case law requiring that the alleged financial threat must be more likely than not to arise, not speculative or remote.
- Recognize the agency’s burden: The agencies should revise the proposal to require that examiners establish by demonstrable and quantifiable evidence that the alleged practice meets this standard.
In the post-Loper Bright world, courts will apply their independent judgment to determine the best reading of the statute. Decades of judicial interpretation have already established that reading, and the agencies’ recent proposal appropriately follows it.
[1] See Unsafe or Unsound Practices, Matters Requiring Attention, 90 Fed. Reg. 48,835 (Oct. 30, 2025).
[2] See, e.g.,Unsafety, Random House (1966) (“unsafe state or condition; exposure to danger or risk; insecurity”); Unsafety, Webster’s New Collegiate (7th ed. 1967) (“want of safety; insecurity”); Unsound, Random House (1966) (“1. not sound; diseased, as the body or mind. 2. decayed or impaired, as timber, foods, etc.; defective. 3. not solid or firm, as foundations. . . . 5. easily broken; light: unsound slumber. 6. not financially strong; unreliable: an unsound corporation”); Unsound, Webster’s New Collegiate (7th ed. 1967) (“not healthy or whole”).
[3] McQuiggin v. Perkins, 569 U.S. 383, 398 n.3 (2013).
[4] Act of July 5, 1837, ch. 321, § 8, in Revised Statutes of the State of New Hampshire 291.
[5] Act of Dec. 4, 1847, ch. 419, § 3, 1847 N.Y. Laws 519.
[6] In re Murray Hill Bank, 47 N.E. 298 (N.Y. 1897).
[7] Humbird Cheese Co. v. Fristad, 242 N.W. 158, 160 (Wis. 1932).
[8] Id.
[9] Before 1966, the federal banking agencies had authority to bring two types of enforcement actions based on the existence of unsafe or unsound practices: removal of bank directors and officers under former 12 U.S.C. § 77, see Banking Act of 1933, ch. 89, § 30, 48 Stat. 193-94, https://govtrackus.s3.amazonaws.com/legislink/pdf/stat/48/STATUTE-48-Pg162a.pdf, and termination of deposit insurance under 12 U.S.C. § 1818(a). See Banking Act of 1935, ch. 614, § 101, 49. Stat. 690-91, https://govtrackus.s3.amazonaws.com/legislink/pdf/stat/49/STATUTE-49-Pg684.pdf.
[10] Financial Institutions Supervisory Act of 1966: Hearings on S. 3158 Before the H. Comm. on Banking and Currency, 89th Cong., 2d Sess. 49, 112 Cong. Rec. 26,474, 26,474–75 (1966) (“Horne Memorandum”).
[11] Id. at 26,474–75.
[12] Miss. Band of Choctaw Indians v. Holyfield, 490 U.S. 30, 47–48 (1989).
[13] See 12 U.S.C. § 1818(h)(2).
[14] Johnson v. OTS, 81 F.3d 195, 201–04 (D.C. Cir. 1996).
[15] Gulf Fed. Sav. & Loan Ass’n v. FHLBB, 651 F.2d 259, 264 (5th Cir. 1981).
[16] Id.
[17] Id.
[18] See, e.g., In re Seidman, 37 F.3d 911, 928–29 (3d Cir. 1994) (holding that an unsafe or unsound practice “must pose an abnormal risk to the financial stability of the banking institution”); Doolittle v. NCUA, 992 F.2d 1531, 1538 (11th Cir. 1993) (explaining that an unsafe or unsound practice is “conduct deemed contrary to accepted standards of banking operations which might result in abnormal risk or loss to a banking institution or shareholder”).
[19] See, e.g., Abnormal, Black’s Law Dictionary (12th Ed. 2024) (defining “abnormal” as something that is “markedly or strangely irregular”).
[20] See Loper Bright Enters. v. Raimondo, 603 U.S. 369, 427 (2024) (Gorsuch, J. concurring) (“Agency officials, too, may change their minds about the law’s meaning at any time, even when Congress has not amended the relevant statutory language in any way. And those officials may even disagree with and effectively overrule not only their own past interpretations of a law but a court’s past interpretation as well. None of that is consistent with the APA’s clear mandate.”); see also Nat.’l Cable & Telecomms. Ass’n v. Brand X Internet Servs., 545 U.S. 967 (2005); Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984).
[21] See Loper Bright Enters. v. Raimondo, 603 U.S. 369 (2024); Lamie v. U.S. Trustee, 540 U.S. 526, 534 (2004).
[22] 112 Cong. Rec. 24,984 (1966) (statements of Rep. Patman).
[23] Because the Horne Memorandum is part of the legislative history, it provides only additional persuasive support and cannot alter the plain meaning of the statute and courts’ interpretation of the statute. See, e.g., Unicolors, Inc. V. H&M Hennes & Mauritz, L.P., (2022) (discussing the text and statutory context before turning to legislative history as additional “persuasive” support for “those who consider” it).
[24] Horne Memorandum at 26,474–75 (emphasis added).
[25] Id.
[26] Id.
