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California DFI to implement efficiency ratio for CUs
SACRAMENTO, Calif. (9/9/11)--The Credit Union Program in California's Division of Financial Institutions (DFI) has implemented an efficiency ratio to quantify the efficiency of a credit union's operations. "Despite the current fact that the efficiency ratio is not considered a 'key ratio' by the National Credit Union Administration (NCUA) in the review of a credit union's earnings, the efficiency ratio has been a commonly used measure of efficiency in the financial industry for some time," said DFI in its Monthly Bulletin for August, released Thursday. More credit unions have begun to incorporate efficiency ratio targets or limits in formal policy as a means to better evaluate their own performance and to provide for better planning, said DFI. The ratio will also help examiners better identify and communicate the earnings performance of credit unions, the agency added. The efficiency ratio is basically overhead costs (without including the provision for loan loss expense) divided by operating income. It provides in cents how much it costs to produce each dollar of revenue, said DFI, which added that the lower the ratio, the better the credit union's performance. DFI said it is not required that credit unions use the ratio nor that examiners always include it in examination reports. "We recognize that, although the efficiency ratio is an important measure of a credit union's performance, examiners understand that the efficiency ratio is only a part of the picture … however, the efficiency ratio is a valuable tool and the Credit Union Program encourages its use in the examination of its credit union licensees."


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