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Efficiency ratio

The efficiency ratio is non-interest expenses over the sum of net interest income before provision for loan losses plus non-interest income.

Exapanded Definition

It's analogous to dividing operating expenses into revenues. What you get is the percentage of revenues you're spending on operating expenses. The lower the ratio, the better. Numerically, 1 (the numeral 1) minus the efficiency ratio equals a bank's operating margin. Banking executives were obsessed with this ratio after the S&L fallout and the real estate implosion in the northeast and west coast in the early 1990s.

A middle of the road bank runs an efficiency ratio of .7 to 0.8; a good bank from 0.6 to 0.7, and the really lean operations run under 0.6.

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