are more than is needed in areas that already are productive and are not focusing their efforts. One increasingly important practice is to convert all hard-copy documents into electronic images as early as possible in a transaction or process instead of as a final document storage step after the transaction. So, how do you keep your efficiency ratio from creeping into the 70s and 80s (or higher) when it should be in the 50s or 60s? Your first steps should focus on the following four areas: Select a few end-to-end processes that need improvement by prioritizing their impact based on current costs. They are not as high as they should be and this is not good. Since a bank's operating expenses are in the numerator and its revenue is in the denominator, a lower efficiency ratio means that a bank is operating better. You are looking at your company’s liquidity ratios and you are concerned. Part of improving the ratio is to drive down the costs of operation. There are approximately 300 banks in our industry that consistently produce below a 45% efficiency ratio. There is a strong correlation between efficiency ratio and return on assets (Exhibit 2), and banks that reduced their efficiency ratio aggressively over recent years have seen substantially higher share-price appreciation and return on equity improvement than peers (Exhibit 3). The lower the ratio, the better. As with any community banking ratio, the efficiency ratio in itself may not be telling the whole story. For a larger version, click on the image. Instead, you need to incorporate your compliance and risk management requirements into your workflow improvements.Your ideal workflow should improve compliance efficiency, customer service and risk management activities. These ratios … Once your process improvement initiatives are complete, don’t stop there: Create a culture of continuous improvement at your bank so that every employee is prepared and motivated to maintain the cost savings of your initial efforts. Getting your efficiency ratio … These ratios are used by management to help improve the company as well as outside investors and creditors looking at the operations of profitability of the company. All initiatives designed to improve operational efficiency ratios will fail if the right corporate culture isn’t in place. Yet huge opportunities invariably exist. Whether you’re a middle-market bank or a financial institution of a different size, banking compliance is a huge cost you can’t afford to ignore, but you also can’t afford to stay with the current model of continually adding to your in-house Compliance, Risk & Audit Department. Bank of America achieved an operating leverage of 500 basis points in 2Q17. Then, once you’re ready to integrate a new technology platform, a process map ensures that you’ve already eliminated any overlapping activities and incorporated improvements directly into your new workflow. One simple improvement to make this a reality is to use new technology platforms in order to automate compliance tracking, data gathering, controls monitoring, data validation and risk monitoring.You should also contain compliance staffing costs with new sourcing models that mix in-house and outsourced resources. Balance the workload across employees in multiple locations. But there are a few banks that have identified a full range of levers and developed plans to apply them across all of their processes, putting them in position to achieve efficiency gains of 30 percent or more. However, you always need to consider a bank's strategy, business mix, and economies of scale as well. One of the methods of measuring the effectiveness of a credit union is the Efficiency Ratio. This comparison is based on data reported on 2020-09-30. We will assume that most unneeded costs are already cut. After that, we have distilled the below six ways to best effect efficiency performance. ratio, and increase in the base capital requirements. Making efficiency improvement a formal strategy, executing branch transition, digitize various processes, and improving both your customer and product mix can easily drop efficiency below 45%. Formalize Strategy: No bank falls into a 45% efficiency ratio by accident. But this approach is hurting your bank’s efficiency ratio rather than helping it. These processes or workflows should be the most influential on your bottom line while also being the simplest to improve – thus making your work as cost-effective as possible.Then, use a process improvement methodology to drive sustainable cost improvements for these particular processes. With the banking industry facing low margins and hefty compliance investments, banks need to remain vigilant and keep costs well under control. Other useful tools include visible metrics and performance charts along with “line-of-sight” incentives – such as bonuses that are directly related to individual or team performances and practices, not just institutional performances. Blind pursuit of immediate and tangible productivity gains will lead to banks learning how to do all of the wrong activities very efficiently, while more nimble competitors continue to take market share with more relevant offerings. Continued inefficiency at a bank might be robbing important efforts of the resources banks need to be fully successful. One of the best ways to review your processes is through a process mapping exercise. Your efficiency ratio is your expenses/revenue ratio. The bank garnered a 60% efficiency ratio, compared to 63% in 2Q16, which reflects lower spending. Again, there is no one-size-fits-all approach. Improved planning for regulatory capital through the internal capital adequacy assessment process coupled with a holistic evaluation of taxation implications and the regulatory efficiency of capital instruments is important to support long-term return on equity expectations. With the challenges banks are facing these days, it’s becoming clear that banking executives must get the best “bang for the buck” from all resource expenditures. Today, however, the banking industry faces a new combination of circumstances that are giving special impetus to the need for efficiency. Exhibit 1. In other words, the Efficiency Ratio with 50% being optimal, indicates whether banks have an efficient cost structure. sure on banks to improve their earnings and to control costs. Changes in customer preferences and expectations, new competition, and new technologies are transforming the nature of banking. Efficiency ratio = Noninterest Expenses/ (Operating Income – Loan Loss Provision) Becoming more efficient in everything they do is an important strategic objective for banks, and most banks already put forth significant effort to improve their costs after the last recession. As financial institutions race to improve their operating efficiency ratio, here are some strategies you can use to ensure your people, processes, and technology give your team a competitive edge. Banks currently seeking to improve efficiency ratios need to heed these lessons. The business of banking is morphing toward a digital- and technology-based model while retaining important aspects of the traditional person-to-person business model. 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