March 30, 2024 / VOLUME NO. 307

The More the Storm

Does scale matter? It’s a perennial argument in banking, and some banks feel the need to get bigger to compete. But a larger size doesn’t always mean higher returns or even greater efficiencies. 

You wouldn’t normally find a banker waxing poetic in a shareholder letter on the topic, but recently, Harris Simmons, chairman and CEO of Salt Lake City-based Zions Bancorp., leaned on verse to help make his point. Zions had $87.2 billion in assets at the end of 2023, and Simmons expects it to cross the $100 billion threshold within a few years. 

As Simmons explains, the so-called efficiency ratio is the amount of operating expense required to generate one dollar of revenue. The higher the percentage, the worse the efficiency. Simmons analyzed the efficiency ratios of 181 banks in fiscal 2022 to scrub out the effects of the 2023 banking crisis and found that efficiencies don’t necessarily improve with size. The banks in the $5 billion to $10 billion range do about as well as the banks in the $25 billion to $50 billion range, for example. As banks topped $100 billion, their efficiencies worsened, perhaps because of higher regulatory costs. “When one looks at the data, it’s hard to find evidence for much in the way of economies of scale in commercial banking in our country,” Simmons writes.

Source: Zions Bancorp.

When it comes to performance, smaller banks often have an edge. Every year, Bank Director publishes a ranking of the 300 largest publicly traded banks known as RankingBanking. In the 2023 ranking, banks in the $1 billion to $5 billion asset range slightly outperformed larger banks on median return on average assets and return on average equity. 

While the megabanks vacuumed up deposits from nervous customers after the failures of three large regional banks last spring, much of that money has since flowed back to smaller banks. That’s what has happened at Zions, after Simmons watched $7 billion, or nearly 10% of non-brokered “customer deposits,” walk out the door in the first quarter of 2023. By the end of the year, $6.7 billion of those deposits had returned.

Simmons closes his letter by arguing that long-term investments in people and technology, not scale, are what make for a sustainable bank. He quotes Douglas Malloch, an early 20th century American poet, to emphasize his point. 

Good timber does not grow with ease:

The stronger wind, the stronger trees;

The further sky, the greater length;

The more the storm, the more the strength.

• Naomi Snyder, editor-in-chief for Bank Director

2024 Risk Survey: Bank Leaders Focus on Regulations, Deposit Pricing 

Regulatory pressures and deposit pricing are top of mind for bank executives and board members, according to Bank Director’s 2024 Risk Survey. 

A majority of respondents (65%) say their bank has undergone a regulatory exam since the March 2023 failure of Silicon Valley Bank. Of those respondents, more than half (54%) say their most recent exam was more stringent compared to prior exams.

• Laura Alix, director of research for Bank Director

Redefining Banking Stability: Lessons From SVB’s Fall and the Road to Resilience 

Diverse and innovative loan portfolio management can ensure the resilience and growth of financial institutions.

Three Key Foundations for Implementing AI in Financial Institutions

Establishing stringent governance, risk management and standardization practices is essential for successfully adopting artificial intelligence.

10 Mistakes to Avoid in M&A Loan Portfolio Due Diligence

Conducting proper and thorough due diligence will save banks headaches down the road.

Is the FDIC’s IT Exam Effective?

FDIC’s watchdog worries the outdated IT exam could miss risk at banks.