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. Ratio Analysis

    A ratio analysis is a quantitative analysis of information contained ...
  4. Problem Loan Ratio

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

    A measure of profitability used by an insurance company to indicate ...
  6. Bank

    A financial institution licensed as a receiver of deposits. There ...
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

    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 ...
  3. 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.
  4. Investing

    Texas Ratio Rounds Up Bank Failures

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

    Analyze Investments Quickly With Ratios

    Make informed decisions about your investments with these easy equations.
  6. 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.
  7. Investing

    Key Financial Ratios to Analyze Retail Banks

    Learn about key financial metrics that investors use to evaluate retail banks, and how the industry is fundamentally different from most other industries.
  8. Investing

    Efficiency Ratio

    There are many types of efficiency ratios, but all measure how well a company utilizes its resources to make a profit. Business managers use these ratios to determine how well they are operating ...
  9. Investing

    Key Financial Ratios to Analyze Investment Banks

    Find out which financial ratios are most useful when analyzing an investment bank, and why tracking capital efficiency is especially important.
  10. Financial Advisor

    Why Banks Don't Need Your Money to Make Loans

    Contrary to the story told in most economics textbooks, banks don't need your money to make loans, but they do want it to make those loans more profitable.
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. 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. 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 >>
  4. How do stock dividends affect the retained earnings account?

    Understand the difference between financial ratio analysis and accounting ratio analysis. Learn why ratio analysis is important ... Read Answer >>
  5. How can a company quickly increase its liquidity ratio?

    Discover what high and low values in the liquidity ratio mean and what steps companies can take to improve liquidity ratios ... Read Answer >>
  6. 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 >>
Hot Definitions
  1. Graduate Record Examination - GRE

    A standardized exam used to measure one's aptitude for abstract thinking in the areas of analytical writing, mathematics ...
  2. Graduate Management Admission Test - GMAT

    A standardized test intended to measure a test taker's aptitude in mathematics and the English language. The GMAT is most ...
  3. Magna Cum Laude

    An academic level of distinction used by educational institutions to signify an academic degree which was received "with ...
  4. Cover Letter

    A written document submitted with a job application explaining the applicant's credentials and interest in the open position. ...
  5. 403(b) Plan

    A retirement plan for certain employees of public schools, tax-exempt organizations and certain ministers. Generally, retirement ...
  6. Master Of Business Administration - MBA

    A graduate degree achieved at a university or college that provides theoretical and practical training to help graduates ...
Trading Center