Loan To Deposit Ratio Calculator

One division that tells you how a bank is funded

A bank takes money in and lends money out. The loan to deposit ratio compares those two directly.

Loans divided by deposits, as a percentage. At 80 percent, the bank has lent eighty of every hundred it holds in deposits. At 150 percent, it has lent half again more than it holds, which means half of that lending was funded by something other than depositors.

Two numbers, one division, and it is one of the fastest reads available on a bank's balance sheet. Analysts look at it before almost anything else. There is a specific reason why, and you will find it in the section on Northern Rock.

Two boxes

1. Loans. Total loans outstanding, usually net of provisions for bad debts.
2. Deposits. Total customer deposits.

Loan to deposit ratio = loans ÷ deposits × 100

Both figures come from the same balance sheet date, from the same set of accounts. Loans sit on the asset side, deposits on the liability side, and this compares one against the other.

Use net loans if the accounts give you the choice, since gross loans include amounts the bank does not expect to recover, and a ratio built on money that will never come back is a slightly optimistic ratio.

What the number is telling you

So what is the ratio actually telling you?

One thing: how much of this bank's lending is funded by its own depositors.

That matters more than it sounds, because deposits are the most stable funding a bank has. Retail deposits are spread across thousands of people, most of them are insured up to a limit, and they tend to stay put even when the news is bad.

Everything else is less stable. Wholesale borrowing from other banks, bonds issued into the market, short-term money market funding. All of it is cheaper to arrange and all of it can disappear at exactly the moment you need it most, because the people providing it are professionals who read the same news you do.

So the ratio is really a measure of how much of the bank rests on the reliable funding and how much rests on the fragile kind.

There is a second reading too. A very low ratio says the bank is holding money it has not put to work, which is safe and unprofitable. A very high one says the opposite. The next few sections walk both ends.

Five banks

Broadly, somewhere between 80 and 100 percent is where most commercial banks sit and where supervisors are comfortable. Below that and the bank is leaving money idle. Above it and the funding question starts to matter.

Those are conventions rather than rules, and they vary by country, by banking model and by regulator. A bank whose business is mostly corporate lending funded from the market can run structurally higher than a retail savings bank, and neither is doing anything wrong.

Above a hundred percent, and where the rest comes from

A ratio above 100 means the bank has lent out more than it holds in deposits. Which raises the obvious question, and the answer is the whole point of the ratio.

The rest came from somewhere else. And that somewhere is one of a short list: borrowing from other banks, issuing bonds, short-term wholesale markets, or the bank's own capital.

So which is it? The ratio will not tell you. It only tells you how much you need to go and find out about.

Here is what the ratio implies about the mix:

None of that is illegal or even unusual. Plenty of well-run banks operate above 100 percent, and market funding is a normal part of banking.

But here is the thing. Deposit funding and market funding behave completely differently in a crisis.

Deposits are sticky. Most depositors are insured, most are not watching the credit markets, and a great many will not move their account even if they hear something worrying.

Market funding is not sticky at all. It is provided by institutions whose job is to assess risk, and when they decide a bank looks shaky they do not phone anyone. They simply decline to roll the funding over when it matures, which can be a matter of weeks or days.

So a high ratio is not a statement that the bank is badly run. It is a statement that the bank needs the markets to keep saying yes.

The bank that showed everyone why it matters

In September 2007, queues formed outside branches of Northern Rock in Britain. It was the first run on a British bank in well over a century, and photographs of it went round the world.

If you remember the pictures, you probably remember the story that went with them: depositors panicked and pulled their money out.

That is not what happened. That is what happened afterwards.

Northern Rock had grown extremely fast by lending far more than it took in deposits, funding the gap by packaging mortgages and selling them into wholesale markets. Its loan to deposit ratio was several times what a conventional retail bank would run.

When credit markets seized up in August 2007, that funding stopped being available. Not because anybody doubted the mortgages, at least initially, but because the markets stopped functioning generally. The bank had a large book of perfectly good loans and no way to fund them.

It approached the Bank of England for support, the news became public, and only then did the queues form.

The lesson analysts drew is the reason this ratio gets looked at first. A bank does not usually fail because its loans go bad, at least not quickly. It fails because it cannot roll over its funding, and it can happen in days to a bank that looked solvent on Friday.

Deposit insurance stops depositors running. Nothing stops the wholesale market from walking away.

Too low is a problem too

Given all that, you might reasonably conclude the lower the better.

It is not.

A bank at 60 percent is sitting on forty percent of its deposits doing nothing much. It is paying interest to depositors on all of it and earning lending margin on only some of it.

Safe, and not a business.

Banks earn the spread between what they pay for deposits and what they charge for loans. A bank that will not lend has removed its own main source of income, and if it persists it either shrinks or gets bought.

So a very low ratio raises its own questions. Is the bank unable to find borrowers it considers good enough? Is it holding cash because it is worried about something? Is it being deliberately cautious ahead of trouble, or is it simply badly run?

Which is why the ratio has a range rather than a direction. Too high and the funding is fragile. Too low and the business is not working. The interesting information is usually in which way it is moving rather than where it sits.

A ratio climbing steadily over several years is worth attention, because it means lending is outgrowing deposits and the gap is being filled from somewhere. That was the Northern Rock pattern, and it was visible in the accounts for years before anything happened.

What one ratio cannot see

Four things, and each of them can make an identical ratio mean something different.

The quality of the loans. Two banks at 95 percent, one lending on prime mortgages and one lending unsecured to weak borrowers, are in very different positions. This measures how much has been lent, not how likely it is to come back.

The stability of the deposits. Not all deposits are sticky. Large corporate deposits and brokered deposits move on rate far more readily than small insured retail balances. A bank whose deposit base is a few large accounts is more fragile than the ratio suggests.

The term structure. A bank funding thirty year mortgages with three month wholesale paper has a maturity mismatch that this ratio is entirely blind to, and maturity mismatch is what actually kills banks.

The capital position. How much of the bank is funded by shareholders rather than by anybody it has to repay. That is a different question and a formally regulated one, measured by capital adequacy ratios rather than this.

So treat it as the first question rather than the last. It is quick, it is available from any set of bank accounts, and it points you at what to look at next. It does not settle anything on its own.

This is an educational calculation based on figures you supply, and nothing here is financial advice or an assessment of any institution.

Questions people ask

How is the loan to deposit ratio calculated?

Total loans divided by total deposits, multiplied by 100. A bank with 800 of loans and 1,000 of deposits has a ratio of 80 percent.

What is a good loan to deposit ratio?

Broadly 80 to 100 percent for a commercial bank, though it varies by country, business model and regulator. Below that suggests idle funds, above it means part of the lending is funded from markets rather than depositors.

Can it be above 100 percent?

Yes, and plenty of well-run banks operate there. It means lending exceeds deposits, with the difference funded by wholesale borrowing, bond issuance or the bank's own capital.

Why is a high ratio considered risky?

Because market funding can disappear quickly while deposits tend to stay put. A bank leaning heavily on wholesale funding needs those markets to keep lending to it, and they can stop within days.

Is a low ratio safe?

Safer on funding and worse as a business. A bank at 60 percent is paying for deposits it is not earning a lending margin on, which raises questions about whether it can find good borrowers.

Should I use gross or net loans?

Net of provisions where the accounts allow it, since gross loans include amounts the bank does not expect to recover.

What happened at Northern Rock?

It ran a loan to deposit ratio several times the conventional level, funding the gap in wholesale markets. When those markets froze in 2007 the funding vanished, and the depositor queues came after the crisis rather than causing it.

What should I look at alongside it?

Loan quality, how stable the deposit base actually is, the maturity mismatch between funding and lending, and the bank's capital position. This ratio is the first question rather than the last.

References

The loan to deposit ratio as a measure of funding structure and liquidity, and the distinction between stable retail deposit funding and less stable wholesale market funding, follow the liquidity framework set out by the Basel Committee on Banking Supervision, whose Net Stable Funding Ratio formalises the treatment of different funding sources by their expected stability. The account of Northern Rock's funding model and its failure follows the Bank of England's published analysis of the episode. The role of deposits and bank lending in money creation, and the constraints on bank lending in practice, come from the Bank of England's Quarterly Bulletin.

1. Basel Committee on Banking Supervision, Basel III: The Net Stable Funding Ratio. Bank for International Settlements. https://www.bis.org/bcbs/publ/d295.htm
2. Basel Committee on Banking Supervision, Basel III: The Liquidity Coverage Ratio and Liquidity Risk Monitoring Tools. Bank for International Settlements. https://www.bis.org/publ/bcbs238.htm
3. McLeay, M., Radia, A., and Thomas, R. (2014). Money Creation in the Modern Economy. Bank of England Quarterly Bulletin, 54(1), 14 to 27. https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy