Loading the player...

What is the 'Loan-To-Deposit Ratio - LTD'

The loan-to-deposit ratio (LTD) is a commonly used statistic for assessing a bank's liquidity by dividing the bank's total loans by its total deposits. This number is expressed as a percentage. If the ratio is too high, it means that the bank may not have enough liquidity to cover any unforeseen fund requirements, and conversely, if the ratio is too low, the bank may not be earning as much as it could be.

BREAKING DOWN 'Loan-To-Deposit Ratio - LTD'

To calculate LTD ratio, take the total amount of loans granted by a bank over a specific period of time and divide by the amount of deposits received by the bank over the same period. For example, if a bank loans $3 million and it accepts $5 million in deposits over the same period, it has a LTD ratio of three-fifths or 60%.

What Causes Changes to LTD Ratios?

Multiple factors can cause changes in LTD ratios. For example, when the Federal Reserve lowers interest rates, the low rates encourage consumers to take out loans. Simultaneously, however, these rates deter investors from investing or buying securities, thus increasing the amount of cash they tend to deposit into bank accounts. Shifts such as these can lower the overall LTD ratio. For example, in 2008, the overall LTD ratio for U.S. commercial banks was 100%, but after years of low interest rates following the global financial crisis, the ratio dropped to 77% in 2015.

What Is an Ideal LTD Ratio?

Tradition and prudence indicate that the ideal LTD ratio is between 80 and 90%. However, banks also have to keep relevant regulations in mind. The Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation (FDIC) do not set minimum or maximum LTD ratios for banks. However, these agencies monitor banks to see if their ratios are compliant with section 109 of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994.

How Are LTD Ratios Used?

In reference to section 109, banks are not allowed to set up branches in states other than their home states for the sole purpose of collecting deposits. To keep tabs on this activity, if a bank sets up a branch in another state, the OCC, the Fed and the FDIC look at the bank's LTD ratio and compare it to the overall ratio of the other banks in the host state. If these ratios differ too dramatically, and the bank is not serving the credit needs of its communities, it is in breach of the law and subject to sanctions. Additionally, the LTD ratio is often used by policy makers to make assessments about the lending practices of financial institutions.

RELATED TERMS
  1. Current Ratio

    The current ratio is a liquidity ratio measuring a company's ...
  2. Key Ratio

    A mathematical ratio that illustrates and summarizes the current ...
  3. Combined Ratio

    A measure of profitability used by an insurance company to indicate ...
  4. Problem Loan Ratio

    A ratio in the banking industry that denotes the percentage of ...
  5. Accounting Ratio

    A way of expressing the relationship between one accounting result ...
  6. Activity Ratios

    Accounting ratios that measure a firm's ability to convert different ...
Related Articles
  1. Investing

    What Is Loan-To-Deposit Ratio?

    The loan-to-deposit ratio shows the percentage of a bank’s loans that the bank funds with its deposits.
  2. Personal Finance

    Explaining the Reserve Ratio

    Reserve ratio is the amount of cash a bank must keep in its bank vaults or deposit into a central, governing bank.
  3. Investing

    Texas Ratio Rounds Up Bank Failures

    This measure can help investors spot potential trouble in a bank's financials. Find out how.
  4. Investing

    Financial Ratios to Spot Companies Headed for Bankruptcy

    Obtain information about specific financial ratios investors should monitor to get early warnings about companies potentially headed for bankruptcy.
  5. Investing

    Should India Be On Investors' Radars?

    Policy paralysis and investor indifference have defined India for some time, but a new government bent on cutting red tape and ramping up infrastructure spending could put the country back on ...
  6. Investing

    Sysco and Other Big Movers In Services

    The market has been slipping so far today. The Nasdaq has fallen 0.3%; the S&P 500 has fallen 0.4%; and the Dow has declined 0.5%. The Services sector (IYC) is currently lagging behind the overall ...
  7. Investing

    Dynamic Current Ratio: What It Is And How To Use It

    Learn why this ratio may be a good alternative to the current, cash and quick ratios.
  8. Investing

    6 Basic Financial Ratios And What They Reveal

    These formulas can help you pick better stocks for your portfolio once you learn how to use them.
RELATED FAQS
  1. What metrics can be used to evaluate companies in the banking sector?

    Learn which metrics are most useful to evaluate companies in the banking sector and associated issues with such metrics when ... Read Answer >>
  2. To what extent should you take a company's liquidity ratio into account before investing ...

    Find out how important it is for an investor to know a company's liquidity ratio before deciding to invest, and why relying ... Read Answer >>
  3. How do leverage ratios help to regulate how much banks lend or invest?

    Learn what leverage ratios mean for banks, how regulators restrict leverage, and what impact ratios have on a bank's ability ... Read Answer >>
  4. What is the difference between the capital adequacy ratio and the leverage ratio?

    Explore what differentiates the capital adequacy ratio from any one of several leverage ratios used for equity evaluation ... Read Answer >>
  5. Is there a downside to having a high liquidity ratio?

    Find out why it might be disadvantageous for a company to have liquidity ratios that are too high, and learn how to find ... Read Answer >>
  6. Which financial metrics are best for analyzing companies in the chemicals sector?

    Learn about some of the key financial metrics that investors and market analysts commonly use to evaluate companies in the ... Read Answer >>
Hot Definitions
  1. Down Round

    A round of financing where investors purchase stock from a company at a lower valuation than the valuation placed upon the ...
  2. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  3. Portfolio Investment

    A holding of an asset in a portfolio. A portfolio investment is made with the expectation of earning a return on it. This ...
  4. Treynor Ratio

    A ratio developed by Jack Treynor that measures returns earned in excess of that which could have been earned on a riskless ...
  5. Buyback

    The repurchase of outstanding shares (repurchase) by a company in order to reduce the number of shares on the market. Companies ...
  6. Tax Refund

    A tax refund is a refund on taxes paid to an individual or household when the actual tax liability is less than the amount ...
Trading Center