Academic journal article ABA Banking Journal

Real Efficiency Gains Seen in '05

Academic journal article ABA Banking Journal

Real Efficiency Gains Seen in '05

Article excerpt

One enduring trend in banking is the goal to become more efficient, measured most commonly by the efficiency ratio. The intent behind the ratio is to measure the amount of operational expense (often called general and administrative expense) associated with gathering revenue (net interest plus non-interest income). The lower the ratio, the more efficient the bank.

Two other metrics that lend themselves to gauging efficiency are the ratios of G&A expense to assets and revenue to assets. Banks with lower ratios of G&A expense are often doing better than higher-ratio banks. Banks with higher ratios of revenue to assets are often doing better than lower-ratio banks.

In general 2005 was a good year for the banks in our study, which used the major exchange traded banks for which SNL had 12-month data for 2005 and 2004. As can be seen in the table, for the 12 months ending Dec. 31, 2005, the average efficiency ratio was 61.43 %, two percentage points better than the previous year's average of 63.43%. The medians over the same periods were 60.65% and 61.68% respectively. Similar improvements were seen in the ratio of G&A expense to assets and revenue to assets in both the median and the average.

Most notable perhaps is the contraction in the variation among banks in the metrics, as measured by the standard deviation. The contraction shows that the trend toward the average behavior is becoming sharper, which in turn suggests that banks are seeing real gains in these areas and are truly becoming more efficient. …

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