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Reality Sets In For Loan-To-Deposit Ratios

This Month in Retail Banking

The loan-to-deposit ratio (LDR) is a simple measurement used to assess a bank’s liquidity by comparing its total loans with its total deposits for the same period. As everyone is aware, the response to the pandemic delivered a surge of liquidity that reduced banks’ LDRs to levels not seen in nearly half a century. Many institutions mistook their specific excess liquidity position as good liquidity management instead of what it was – dumb luck.  

As the economy moved to reopen in the second half of 2021, the industry started to see early, albeit small, movements toward the normalization of liquidity positions. This trend was exacerbated by inflationary forces (i.e. customers drawing down balances) and the Fed’s response (i.e. fastest velocity of rate increases since the 1980s). This resulted in a significant shift in customer behavior across all lines of business within banking.  

While many institutions continue to hold good liquidity levels (e.g. LDRs below 80%), the past three quarters have been excruciating for others. Bank executives who thought they possessed a deep understanding of their retail segments or commercial clients found out the hard way that they weren’t prepared to retain their most valuable source of funding. As a result, there are several examples of banks witnessing 15-25 percentage point swings in their LDR over the trailing 12 months!  

Curinos expects this “surprised” bucket of banks to grow without a plan of attack to stop the bleeding. It may well be too late to play defense. And relying on the Fed to pivot on rate hikes isn’t a strategy that investors will bless.  

Figure 1: Loan-to-Deposit Ratio

Source: S&P Market Intelligence, all commercial banks

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