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A macroprudential approach to address liquidity risk with the Loan-to-Deposit ratio

  • Jan Willem van den End

This paper maps the empirical features of the Loan-to-Deposit (LTD) ratio with an eye on using it in macroprudential policy to mitigate liquidity risk. We inspect the LTD trends and cycles of 11 euro area countries by filtering methods and analyze the interaction between loans and deposits. We propose that the trend of the LTD ratio is maintained within an upper and lower bound to avoid bad equilibria. To manage the LTD ratio between the boundaries we formulate two macroprudential rules. One that stimulates banks to issue retail deposits in an upturn and one that incentivizes banks to create loanable funds to support lending in a downturn, facilitated by a sufficiently long adjustment period.

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File URL: http://www.dnb.nl/en/binaries/Working%20Paper%20372_tcm47-286219.pdf
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Paper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 372.

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Date of creation: Feb 2013
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Handle: RePEc:dnb:dnbwpp:372
Contact details of provider: Postal: Postbus 98, 1000 AB Amsterdam
Web page: http://www.dnb.nl/en/

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  1. Markus K. Brunnermeier & Lasse Heje Pedersen, 2009. "Market Liquidity and Funding Liquidity," Review of Financial Studies, Society for Financial Studies, vol. 22(6), pages 2201-2238, June.
  2. Mark Mink & Jan P.A.M. Jacobs & Jakob de Haan, 2012. "Measuring coherence of output gaps with an application to the euro area," Oxford Economic Papers, Oxford University Press, vol. 64(2), pages 217-236, April.
  3. Richard Johnson, 2001. "Fiscal reaction rules in numerical macro models," Research Working Paper RWP 01-01, Federal Reserve Bank of Kansas City.
  4. Mathias Drehmann & Claudio Borio & Kostas Tsatsaronis, 2011. "Anchoring Countercyclical Capital Buffers: The role of Credit Aggregates," International Journal of Central Banking, International Journal of Central Banking, vol. 7(4), pages 189-240, December.
  5. Jagjit S. Chadha & Luisa Corrado, 2011. "Macro-prudential Policy on Liquidity: What does a DSGE Model tell us?," Studies in Economics 1108, School of Economics, University of Kent.
  6. Anil Kashyap & Raghuram Rajan & Jeremy S. Stein, 1998. "Banks as liquidity providers: an explanation for the co-existence of lending and deposit-taking," Proceedings 582, Federal Reserve Bank of Chicago.
  7. Andreas Jobst, 2012. "Measuring Systemic Risk-Adjusted Liquidity (SRL); A Model Approach," IMF Working Papers 12/209, International Monetary Fund.
  8. Mathias Drehmann & Claudio Borio & Kostas Tsatsaronis, 2012. "Characterising the financial cycle: don't lose sight of the medium term!," BIS Working Papers 380, Bank for International Settlements.
  9. Stephen Cecchetti & Michael R King & James Yetman, 2011. "Weathering the financial crisis: good policy or good luck?," BIS Working Papers 351, Bank for International Settlements.
  10. Betz, Frank & Oprica, Silviu & Peltonen, Tuomas A. & Sarlin, Peter, 2013. "Predicting distress in European banks," Working Paper Series 1597, European Central Bank.
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