Efficiency Ratio

Business, Legal & Accounting Glossary

Definition: Efficiency Ratio

Full Definition of 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.

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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Definition Sources

Definitions for Efficiency Ratio are sourced/syndicated and enhanced from:

  • A Dictionary of Economics (Oxford Quick Reference)
  • Oxford Dictionary Of Accounting
  • Oxford Dictionary Of Business & Management

This glossary post was last updated: 5th August, 2021 | 0 Views.