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The Rise in Loan-to-Deposit Ratios: Is 80 the New 60?

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  • James DiSalvo
  • Ryan Johnston

Abstract

Liquidity ratios at small banks have climbed in recent decades. Why has this happened? Should regulators be concerned? A traditional signal that a bank may not have enough liquid assets to cover a sudden loss of funding has increased dramatically at small banks in recent decades. Small banks? median ratio of the value of their loans outstanding to the value of their deposits has risen from around 60 percent in the second half of the 1980s to around 80 percent today. Meanwhile, the same measure of liquidity has increased about 5 percentage points at large banks. How can we explain this big increase in loan-to-deposit (LTD) ratios among small banks? Are higher LTD ratios here to stay? Do they pose risks to the safety and soundness of our small banks?

Suggested Citation

  • James DiSalvo & Ryan Johnston, 2017. "The Rise in Loan-to-Deposit Ratios: Is 80 the New 60?," Economic Insights, Federal Reserve Bank of Philadelphia, vol. 2(3), pages 18-23, July.
    • Handle: RePEc:fip:fedpei:00021
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    1. Adam Ashcraft & Morten L. Bech & W. Scott Frame, 2010. "The Federal Home Loan Bank System: The Lender of Next-to-Last Resort?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(4), pages 551-583, June.
    2. W. Scott Frame & Diana Hancock & Wayne Passmore, 2012. "Federal Home Loan Bank Advances and Commercial Bank Portfolio Composition," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44(4), pages 661-684, June.
    3. James DiSalvo & Ryan Johnston, 2015. "Banking trends: how our region differs," Business Review, Federal Reserve Bank of Philadelphia, issue Q3, pages 16-22.
    4. W. Scott Frame, 2016. "The federal home loan bank system and U.S. housing finance," FRB Atlanta Working Paper 2016-2, Federal Reserve Bank of Atlanta.
    5. R. Alton Gilbert, 1986. "Requiem for Regulation Q: what it did and why it passed away," Review, Federal Reserve Bank of St. Louis, issue Feb, pages 22-37.
    6. James DiSalvo & Ryan Johnston, 2015. "How Our Region Differs," Banking Trends, Federal Reserve Bank of Philadelphia, issue Q3, pages 16-22.
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