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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.

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