Is the Efficiency Ratio Important?
Not everyone thinks the efficiency ratio is the best measure of a bank’s operating efficiency. Susan Krause Bell, a former OCC senior deputy comptroller and now a partner at Promontory Financial Group in Washington, D.C., says smaller, more traditional banks like the ratio because they rely more heavily on interest bearing activities, such as loans and deposits, than on fee income. But “it’s just not a particularly appropriate measure for most banks to rely on,” she says. “It’s an old-fashioned measure. Those that have lower efficiency ratios highly value them.” Strictly following the efficiency ratio could stunt growth and impact business lines such as payment transaction processing, King adds. “Efficiency ratios are not one size fits-all,” he says. “Some banks may have a high-touch service strategy that results in a higher [worse] efficiency ratio. The important differentiation is whether the bank’s higher efficiency ratio is the result of conscious business decisions or the result o
