Loan-to-Deposit Ratio
The loan-to-deposit ratio measures a bank’s total loans relative to its total deposits and indicates its liquidity position.
Meaning in Practice
In practice, the loan-to-deposit ratio (LDR) is calculated by dividing total loans by total customer deposits. A higher ratio suggests that a bank is using a larger share of its deposits to fund lending activities. A lower ratio may indicate more conservative lending or higher liquidity buffers.
Why It Matters
The LDR is a key indicator of funding stability and liquidity risk. Excessively high levels can signal potential funding pressure, especially during periods of deposit outflows. Balanced ratios support sustainable credit growth and financial resilience.
Market Impact
Investors and regulators monitor the LDR to assess a bank’s risk profile and funding strategy. Elevated ratios may increase concerns about liquidity stress and funding costs. Moderate levels generally signal prudent balance sheet management.
Example
If a bank has €900 million in loans and €1 billion in deposits, its loan-to-deposit ratio is 90%, indicating that most deposits are being used to fund lending.