Scholarly Articles and Other Contributions
 

Document Type

Article

Publication Date

1995

Abstract

The term "unsafe or unsound banking practices" serves as a statutory trigger for virtually every key administrative sanction available against bank directors. Congress has not defined either the term "unsafe or unsound banking practices" or its counterpart "safety and soundness," leaving the federal banking agencies considerable discretion in the interpretation and application of the term. Given the potential breadth of the term, the banking agencies have the ability to seek administrative remedies in cases covering a broad range of director conducL Thus, "unsafe or unsound banking practices" is a potent source of director liability.

Professor Schooner argues that "unsafe or unsound banking practices" and the common law fiduciary duty of care appear to share the same theoretical basis. Although both concepts are derived from negligence theory, Professor Schooner shows that they retain certain vital differences in application. In cases brought by the FDIC or the RTC as receivers for failed banks against bank directors for breach of the fiduciary duty of care, the business judgment rule requires courts to defer to directors' business decisions. In reviewing administrative actions against bank directors for unsafe or unsound banking practices, however, courts must defer to the banking agencies' determinations. Professor Schooner argues that, as a result of this difference in application, the principles of safety and soundness create a higher standard of care for bank directors than that imposed by the common law fiduciary duty of care. She suggests that this inconsistency proves most troublesome in the context of the agencies' cease and desist power. She concludes that the banking agencies could remedy this inconsistency by adopting policies that implement any of several modest restraints on the potential breadth of the safety and soundness principle.

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