An efficiency ratio under 50?! You say B.S. I say easy peasy.

michael's picture

What does it take to get a better efficiency ratio?

Getting more efficient, of course. 
What does that mean? 
It means doing to everyday internal processes what Check21 did to couriers, proof machines, sorters, and rubber-banded cash letters. 
Eliminate the handoffs, rekeying, verifications, and printing. 

Use electronic information and images throughout the process from start to finish. 

This type of process reengineering has no sense of urgency for two reasons. 

First, there is no Check21-like law driving how banks can change their processes for the way they handle loan applications, or debit card disputes, or new employees. Banks are left to their own devices or what their vendor sells them. 

Community banks are at a bigger disadvantage because they lack the resources in staff and skills to blow up the current paper-based manual processes and start over; building new digital and automated processes.  The technology exists and has for years. 

Second, the C-level is too far removed from the processes to understand the waste and translate that into wasted operating expense.  Let me clear that up right now.

Measures for 4,025 Banks $100MM-$2B in Assets 25th Percentile Median 75th Percentile
Efficiency Ratio 55% 63% 72%
Assets per FTE $3,668 $4,473 $5,722
Salary+Benefits per FTE $30 $35 $42
Expense Reduction Opportunity $537 $908 $1,727
New Assets per FTE $4,975 $6,262 $8,263
Asset Growth Potential (scalability) 26% 29% 31%

Banks under $2 billion have a median efficiency ratio of 63% with the worst performers at 72%.  Knowing how efficient automated and high performing processes are, banks should be able to shave 15 percentage points off their efficiency ratios by focusing on 12 key processes.  For the median community bank this translates into a savings of $908,000 annually, two-thirds of which is in FTE and the rest in consumables like paper and storage or shredding services (because we save or shred what we print). 
If the bank doesn't have the appetite for FTE reductions, this can also translate into scalability.  With these kind of high performing processes, a bank can grow 30% without adding staff.

Check out The Dirty Dozen, 12 key processes for high performance to learn which processes to tackle.


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