Loan to Deposit Ratio (Loan to Deposit Ratio = Loans/Deposits)
The formula for the loan to deposit ratio is exactly as its name implies, loans divided by deposits. The loan to deposit ratio is used to calculate
a lending institution
's ability to cover withdrawals made by its customers. A lending institution that accepts deposits must have a certain measure of liquidity
to maintain its normal daily operations. Loans given to its customers are mostly not considered liquid meaning that they are investments over a longer period of time. Although a bank will keep a certain level of mandatory reserves
, they may also choose to keep a percentage of their non-lending investing in short term securities to ensure that any monies needed can be accessed in the short term Loan-deposit ratio
, also known as the LTD
ratio, is a ratio between the banks total loans and total deposits.
If the ratio is lower than 1, the bank relied on its own deposits to make loans to its customers, without any outside borrowing
. If, on the other hand, the ratio is greater than 1, the bank borrowed money which it reloaned at higher rates, rather than relying entirely on its own deposits. Banks may not be earning an optimal
return if the ratio is too low. If the ratio is too high, the banks might not have enough liquidity to cover any unforeseen funding requirements or economic crises. It is a commonly used statistic
for assessing a bank's liquidity.