Bank NIM, Efficiency Ratio & Basel III LCR Formula

Divide NIM by Average Earning Assets (NOT Total Assets!) and enforce Basel’s 75% LCR inflow cap!

Commercial-bank analysts track three core ratios across spread profitability, cost discipline, and short-term run resilience! First, Net Interest Margin NIM = (Interest_Income - Interest_Expense) / Average_Earning_Assets divides Net Interest Income (NII) by Average Interest-Earning Assets (loans + securities + interest-bearing central-bank reserves — EXCLUDING non-earning goodwill, branches, and vault cash)! Second, Bank Efficiency Ratio = Non_Interest_Expense / (NII + Non_Interest_Income) measures overhead cents spent per dollar of net revenue (lower is better; < 55% is strong)! Third, post-2008 Basel III Liquidity Coverage Ratio LCR = Stock_HQLA / MAX(Gross_30d_Outflows - MIN(Gross_30d_Inflows, 0.75 * Gross_30d_Outflows), 0.25 * Gross_30d_Outflows) = HQLA / MAX(Outflows - Inflows, 0.25 * Outflows) caps contractual inflows at 75% of outflows so no bank can claim zero net outflows without holding High-Quality Liquid Assets (minimum regulatory LCR >= 1.00 = 100%)!

Verify on Interest_Income = 520 ($M, B2), Interest_Expense = 200 ($M, B3 -> NII = 320 $M), Avg_Earning_Assets = 8,000 ($M, B4), Non_Interest_Fee_Income = 180 ($M, B5 -> Total Net Revenue = 500 $M), Non_Interest_OpEx = 275 ($M, B6), Stock_HQLA = 900 ($M, B7), Stressed_30d_Outflows = 1,000 ($M, B8), and Contractual_30d_Inflows = 250 ($M, B9): NIM is (520 - 200) / 8,000 = 0.0400 (4.00%); Efficiency Ratio is 275 / (320 + 180) = 0.5500 (55.00%); and Basel III LCR is 900 / MAX(1,000 - 250, 0.25 * 1,000) = 900 / 750 = 1.2000 (120.0% >= 100% minimum)! Now test Inflows = 900 ($M): Basel’s 75% inflow cap floors Net Outflows at 0.25 * 1,000 = 250 ($M -> LCR = 900 / 250 = 3.6000 instead of 9.0000)!

Net Interest Margin (NIM) & Bank Efficiency Ratio Formula

Validate Average_Earning_Assets > 0 and strictly positive total net revenue NII + Non_Interest_Income > 0.

=IF(OR(B4 <= 0, B2 < 0, B3 < 0), "Invalid Bank Input", ROUND((B2 - B3) / B4, 4))

Basel III Liquidity Coverage Ratio (LCR) with 75% Inflow Cap Formula

Algebraic identity Outflows - MIN(Inflows, 0.75 * Outflows) equals MAX(Outflows - Inflows, 0.25 * Outflows) identically for all Outflows > 0 and Inflows >= 0!

=LET(hq_la, B7, out_30, B8, in_30, B9, IF(OR(hq_la < 0, out_30 <= 0, in_30 < 0), "Invalid LCR Input", ROUND(hq_la / MAX(out_30 - in_30, 0.25 * out_30), 4)))

Further reading

• Arte Sheets Lesson — Diamond-Dybvig Bank Run Threshold & Liquidity Formula
• Arte Sheets Lesson — Stiglitz-Weiss Adverse Selection Credit Rationing Formula