Summary
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 Unsafe and unsound banking practice
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
 This
definition, while forming the core of the analysis of unsafe and unsound
practices, has generated some interpretative differences among the Circuit
Courts of Appeal, notably regarding how severe must be the potential effect upon
the institution and how direct the potential effect must be upon financial
soundness. See and compare, for example
- Some commentators have suggested that, in
addition to the "reasonable banker" standard expressed above, there are certain
practices, including diversion of income to affiliates or insiders, payment of
incentive fees to officers with final credit or fiduciary account approval
authority and inappropriate accounting practices of a material nature, that
amount to "per se" unsafe or unsound practices
Section
39 of the
FDIA added by the Federal Deposit Insurance Corporation
Improvement Act of 1991 FDICIA mandated that the federal banking
agencies promulgate standards for safety and soundness by regulation or
guideline -
12 USC 1831p-1 In
response, the four agencies NCUA was not covered by the FDIA adopted the near
identical regulation / guidelines indexed below In
addition, FDIC adopted regulations specifying the contra
to Safety and Soundness, namely, Unsafe and Unsound Banking Practices.
This regulation, indexed below, places specific limitations on certain banking practices it believes are likely to have
adverse effects on the safety and soundness of insured state nonmember banks or
which are likely to result in violations of law, rule, or regulation Among
the practices that are circumscribed by this regulation are standby letters of
credit, extensions of credit to executive officers, directors, and principal
shareholders of insured nonmember banks, and brokered deposits
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Safety and Soundness Regulations
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OCC 12 CFR Part 30 - Safety and Soundness Standards
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30.1
Scope
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30.2
Purpose
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30.3
Determination and notification of failure to meet
safety and soundness standard
and request for
compliance plan
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30.4 Filing of safety and soundness compliance plan.
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30.5
Issuance of orders to correct deficiencies and to
take or refrain from taking other
actions
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30.6
Enforcement of orders
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App A to Pt 30 - Interagency
guidelines establishing
standards
for safety and
soundness
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App B to Pt 30
- Interagency guidelines
establishing
information security standards
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App B, Supp A - Interagency guidance on response
programs for unauthorized access to
customer info and customer
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App C - Guidelines establishing standards for residential
mortgage
lending practices
FRB
FDIC
 12
CFR Part 337 - Unsafe and unsound banking
Practices
- 337.1 Scope
- 337.2 Standby letters of credit
- 337.3 Limits on ext
of credit to exec officers, dir, and
principal shareholders of
insured nonmember banks - 337.5 Exemption
- 337.6 Brokered deposits
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337.10 Waiver
- 337.11 Effect on other banking practices
- 337.12 Frequency of examination
12
CFR Part 365 - Standards for safety and soundness
SEC_CODE_REF_0090001192884
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364.100 Purpose
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364.101 Standards for
safety and soundness
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App A to Pt 364 - Interagency
guidelines establishing stds
for safety and soundness
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App B to Pt 364 -
Interagency guidelines establishing
standards
for safeguarding customer
info
OTS 12
CFR Part 570 - Safety and soundness guidelines
and compliance procedures
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570.1
Authority, purpose, scope and preservation of
existing authority
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570.2
Determination and notification of failure to meet
safety and soundness standards
and request for
compliance plan
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570.3
Filing of safety and soundness compliance plan
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570.4
Issuance of orders to correct deficiencies and to
take or refrain from taking
other actions
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570.5
Enforcement of orders
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App A to Pt 570 - Interagency
guidelines establishing
standards for safety and
soundness
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App B to Pt 570 - Interagency
guidelines establishing
standards for safeguarding customer info
NCUA
- The NCUA does not have any
regulations that
address
per se the issue of safety and soundness
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Discussion of Unsafe or Unsound Practices from the
FDIC's Risk Management Manual of Examination Policies
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General
The concept of unsafe or unsound practices is one of general application which
touches upon the entire field of operations of a banking institution. It would,
therefore, be virtually impossible to catalog with a single all inclusive or
rigid definition, the broad spectrum of activities which are included by the
term. Thus, an activity not necessarily unsafe or unsound in every instance may
be so in a particular instance when considered in light of all relevant facts
pertaining to that situation
Like many other generic terms widely used in the law, such as
fraud,
negligence, probable cause, or
good faith, the term
unsafe or unsound practices has a central meaning which can and must be applied to constantly
changing factual circumstances.
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 result in abnormal risk of loss or damage to an institution,
its shareholders, or the insurance fund administered by the FDIC Practices
Deemed Unsafe or Unsound
Unsafe or unsound practices can result
from either action or lack of action by management. The FDI Act does not define
the term "unsafe or unsound practices," but the FDIC's Board of Directors, in
previous Section 8 proceedings, has established examples of such practices, some
of which are listed below
Lack
of Action Deemed Unsafe or Unsound
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Failure to provide
adequate supervision and direction over the officers of the bank to prevent
unsafe or unsound practices, and violation(s) of laws, rules and regulations
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Failure to make provision for an adequate allowance for loan losses
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Failure to post the general ledger promptly
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Failure to keep accurate books and records
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Failure to account properly for transactions
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Failure to enforce programs for repayment of loans
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Failure to obtain or maintain on premises evidence of priority of liens on loans
secured by real estate
Actions
Deemed Unsafe or Unsound
- Operating
with an inadequate level of capital for the kind and quality of assets held
- Engaging
in hazardous lending and lax collection practices which include, but are not
limited to, extending credit which is inadequately secured; extending credit
without first obtaining complete and current financial information; extending
credit in the form of overdrafts without adequate controls; and extending credit
with inadequate diversification of risk
- Operating without adequate liquidity, in light of
the bank's asset and liability mix
- Operating
without adequate internal controls including failing to maintain controls on
official checks and unissued certificates of deposit, failing to segregate
duties of bank personnel, and failing to reconcile differences in correspondent
bank accounts
- Engaging
in speculative or hazardous investment policies.
- Paying excessive dividends in relation to the
bank's capital position, earnings capacity and asset quality
Conditions
Considered Unsafe or Unsound
As in the case of unsafe or unsound practices, it is impossible to define
precisely what constitutes an unsafe or unsound condition because the condition
of the bank is dependent upon an analysis of virtually every aspect of the
bank's operation and position within a given time frame. At a minimum, the
bank's capital position, asset condition, management, earnings posture and
liquidity position must be carefully evaluated. While precise definition of
unsafe or unsound condition is not possible, it is certain that a bank's
condition need not deteriorate to a point where it is on the brink of insolvency
before its condition may be found to be unsafe or unsound
The
following have been found to evidence unsafe or unsound conditions by the FDIC's
Board of Directors
- Maintenance of unduly low net interest margins
- Excessive overhead expenses
- Excessive volume of loans subject to adverse
classification
- Excessive net loan losses
- Excessive volume of overdue loans
- Excessive
volume of nonearning assets
- Excessive large liability dependence
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