BID® Daily Newsletter
Jun 18, 2012

BID® Daily Newsletter

Jun 18, 2012

THE GOLDEN RATIO BANK


You have heard of March 14th as Pi Day - well, today is Phi Day or June 18th. This is the calendar date equivalent of 6.18, otherwise known as the Greek letter "phi." Phi is also known as the basis of the Golden Ratio, as it is the limit factor between any two numbers within the Fibonacci sequence. The Golden Ratio is an irrational number (a never ending or repeating number similar to Pi) that is roughly 1:1.618. Put another way, Phi allows for balanced spacing between a growing set of numbers or proportions. For instance, let a plant grow and it likely ends up growing in proportion to the Golden Ratio. This is why Phi is also called the Golden Mean or the Divine Proportion. Not only does the Golden Ratio possess a number of amazing mathematical properties, but it also shows up throughout nature and governs flower growth, universe formations and the shape of hurricanes. Proportionally, the ratio is called perfect, as it has been used in art for centuries. The ratio is used in the Parthenon and the Great Pyramid. Da Vinci used it in the Mona Lisa, Le Corbusier in his architecture and Debussy in his music. Twitter used the ratio not too long ago for a redesign of their website. The Golden Ratio is also found naturally in banking as well. It can be argued that it represents the ideal: return on assets, net loans to total assets, equity to non-interest bearing deposits, a maximum cash dividend by net income and a safe factor to cover current defaults for a loan loss allowance buffer. Use the Golden Ratio to geometrically grow profitable customers through marketing, technology and branching and you find out that return on assets grow nicely at a 1.618% factor and if you multiply by 10, assets will also grow around 16.18% (not to mention return on equity as well). Keep those ratios in line and the outcome will be a bank of perfectly pleasing proportions. The Golden Ratio bank would not only consistently be in the top 1.618% of all banks, but also have the beautiful aspect of being self-contained. By hitting all the aforementioned performance targets and growing customers in Golden Ratio proportions, operations would produce enough capital to throw off a healthy dividend and maintain healthy capital levels, without having to tap outside investors. While we caution readers not to get too crazy with the Golden Ratio, as it is just one of many growth proportions that works for a bank, it has the advantage of giving boards, management and employees a set of easily identified and memorable objectives. Like the Golden rectangle whose sides are 1.618x its height, the Golden Ratio bank is proportional, stable, pleasing to look at and architectural poetry. Given that it's Phi Day, we thought you might like a different way to look at building a bank.
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