The loan-to-deposit ratio says how much of the deposit base is lent out; read with its denominator it also says what is funding the rest, and what it cannot say about liquidity.
A bank's loan-to-deposit ratio is gross loans divided by total deposits. An illustrative bank with 4,460,000 of loans and 6,480,000 of deposits has a loan-to-deposit ratio of 68.83 per cent: about two-thirds of its deposits are lent out and the rest sits in cash and securities. The ratio rises to 75.80 per cent if the bank loses a fifth of its uninsured deposits, without a single new loan, which is why it has to be read with its denominator and with what funds the gap.
Worked in full in Bank Management by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
| Assets | Amount | Liabilities | Amount |
|---|---|---|---|
| Cash and equivalents | 420,000 | Non-interest-bearing deposits | 1,760,000 |
| Securities, available for sale | 1,180,000 | Savings and interest-bearing deposits | 3,240,000 |
| Securities, held to maturity | 1,640,000 | Time deposits | 1,480,000 |
| Loans, fixed rate | 2,850,000 | FHLB advances | 620,000 |
| Loans, floating rate | 1,610,000 | Subordinated debt | 150,000 |
| Other assets | 300,000 | Share of deposits above the insurance limit | 46% |
| Total assets | 8,000,000 | Total deposits | 6,480,000 |
All figures are fictional. The bank is the one used throughout the companion workbooks of the book.
1. Loans = 2,850,000 + 1,610,000 = 4,460,000.
2. Deposits = 1,760,000 + 3,240,000 + 1,480,000 = 6,480,000.
3. Loan-to-deposit ratio = 4,460,000 / 6,480,000 = 68.83%.
4. Deposits not lent = 6,480,000 − 4,460,000 = 2,020,000, or 31.17 per cent of deposits.
In Excel: =SUM(Loans)/SUM(Deposits). Use average balances when comparing with an income measure such as the margin, and period-end balances for a liquidity snapshot; state which.
Two choices sit inside the numerator. Gross loans are the usual convention; net loans deduct the allowance for credit losses and give a slightly lower ratio, so a bank that has reserved heavily looks less fully lent than its gross book. Loans held for sale are sometimes excluded because they are meant to leave the balance sheet. Whichever is used, the same definition has to run across every period and every peer, or the comparison measures the definitions rather than the banks.
The ratio's meaning depends on the denominator, and three variants are in common use.
| Ratio | Denominator | Result |
|---|---|---|
| Loans / total deposits | 6,480,000 | 68.83% |
| Loans / non-maturity deposits | 5,000,000 | 89.20% |
| Loans / deposits and FHLB advances | 7,100,000 | 62.82% |
| Loans / total assets | 8,000,000 | 55.75% |
On non-maturity deposits only, the deposits a bank treats as its stable franchise, the ratio is 89.20 per cent: the bank is close to fully lending its core funding, and the cash and securities rest mostly on everything else: time deposits, which reprice fast, wholesale advances and capital. On total funding including wholesale advances it is 62.82 per cent. None of them is wrong. A board pack that shows one without the others hides how the bank funds its loans.
| Case | Loans | Deposits | Wholesale | LDR | Loans / all funding |
|---|---|---|---|---|---|
| Base | 4,460,000 | 6,480,000 | 620,000 | 68.83% | 62.82% |
| 20% of uninsured deposits leave, replaced by FHLB | 4,460,000 | 5,883,840 | 1,216,160 | 75.80% | 62.82% |
| Same outflow, met by selling securities | 4,460,000 | 5,883,840 | 620,000 | 75.80% | 68.57% |
| Loans grow 10%, funded by securities run-off | 4,906,000 | 6,480,000 | 620,000 | 75.71% | 69.10% |
| Loans grow 10%, funded by FHLB | 4,906,000 | 6,480,000 | 1,066,000 | 75.71% | 65.01% |
A run and a lending boom produce almost the same loan-to-deposit ratio, 75.80 against 75.71 per cent, for opposite reasons. In the run, uninsured deposits of 2,980,800 lose 596,160 and the ratio rises because the denominator shrinks. In the boom, 446,000 of new loans raise the numerator. The ratio alone cannot tell a board which of the two happened; the deposit line can.
At the other end, the low ratio has a price. Each point of the ratio is 64,800 of loans. Moving to 80 per cent means 724,000 more loans, and at the illustrative 2.63 per cent yield pick-up of fixed-rate loans over available-for-sale securities that is 19,041 of pre-tax income a year before credit costs. The net interest margin effect is worked in how to calculate a bank's net interest margin.
A low loan-to-deposit ratio is not the same as liquidity. Here 40.50 per cent of assets are cash and securities, but most of the securities are long-dated and marked well below cost after a rate rise. Whether they can actually be turned into cash without breaking capital is the question the uninsured deposit coverage ratio answers.
The balance sheet, the marks and the liquidity sources are in the free workbooks for this case.
There is no single correct level, but analysts often treat roughly 80 to 90 per cent as a bank lending its deposits without leaning on wholesale funding. The illustrative bank at 68.83 per cent could lend 724,000 more before reaching 80 per cent; each point of the ratio is 64,800 of loans. A low ratio is not proof of liquidity if the securities it holds instead are marked down.
Because deposits fall while loans stay. When the illustrative bank loses 20 per cent of its uninsured deposits, 596,160, the ratio moves from 68.83 to 75.80 per cent without a single new loan. If the outflow is replaced by FHLB advances, loans to total funding stays at 62.82 per cent, which is why both ratios are needed.
Either can be used, provided it is stated and kept consistent across periods and peers. Net loans deduct the allowance for credit losses and give a slightly lower ratio. The larger choice is the denominator: on non-maturity deposits only, the illustrative bank's ratio is 89.20 per cent, not 68.83.
This article is one calculation from Bank Management. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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