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. Combined Ratio

    A measure of profitability used by an insurance company to indicate ...
  3. Key Ratio

    A mathematical ratio that illustrates and summarizes the current ...
  4. Efficiency Ratio

    Ratios that are typically used to analyze how well a company ...
  5. Problem Loan Ratio

    A ratio in the banking industry that denotes the percentage of ...
  6. Bond Ratio

    A financial ratio that expresses the leverage of a bond issuer. ...
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. Investing

    Analyze Investments Quickly With Ratios

    Make informed decisions about your investments with these easy equations.
  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

    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 ...
  6. Investing

    Ratio Analysis

    Ratio analysis is the use of quantitative analysis of financial information in a company’s financial statements. The analysis is done by comparing line items in a company’s financial ...
  7. Investing

    The Price To Earnings Ratio Explained

    The price to earnings ratio is one of the most important ratios in investing. Find out how it is calculated, how it can be used and what it tells investors about a particular stock.
  8. Investing

    Do Your Investments Have Short-Term Health?

    If a company is strong enough to survive tough times, it is more likely to provide long-term value.
RELATED FAQS
  1. 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 >>
  2. 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 >>
  3. What role does ratio analysis play in valuing a company?

    Learn about the role of ratio analysis in determining company value, including some of the most common ratios used by modern ... Read Answer >>
  4. What are some alternative liquidity ratios to the cash ratio?

    Learn what the cash ratio measures, and understand what two other liquidity ratios can be used by a company to replace the ... Read Answer >>
  5. What is the difference between the loss ratio and combined ratio?

    Learn about the loss ratio and combined ratio, what the two ratios measure and the main difference between the loss ratio ... Read Answer >>
  6. What is the difference between efficiency ratios and profitability ratios?

    Learn about efficiency and profitability ratios, what these ratios measure and the main difference between efficiency and ... Read Answer >>
Hot Definitions
  1. Interest Expense

    The cost incurred by an entity for borrowed funds. Interest expense is a non-operating expense shown on the income statement. ...
  2. Call Option

    An agreement that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument ...
  3. Pro-Rata

    Used to describe a proportionate allocation. A method of assigning an amount to a fraction, according to its share of the ...
  4. Private Placement

    The sale of securities to a relatively small number of select investors as a way of raising capital.
  5. AAA

    The highest possible rating assigned to the bonds of an issuer by credit rating agencies. An issuer that is rated AAA has ...
  6. Backward Integration

    A form of vertical integration that involves the purchase of suppliers. Companies will pursue backward integration when it ...
Trading Center