Loan-to-deposit ratios, which he referred to as “venerable, oft-quoted and almost meaningless,” bore the brunt of criticism. The ratio makes false assumptions, he said. The loan-to-deposit ratio assumes that all sources of funding other than deposits are stable, that all deposits are unstable, that all assets other than loans are completely liquid and that loans are completely illiquid. However, that is “not the case”, he said.
The solution is to measure the quantity of liquidity you have or can get relative to the quantity of liquidity that you think you may need. Practitioners should also sum current liabilities they may lose plus new assets they may have to fund, and also measure liquidity using scenario analysis.
The week on Risk.net, July 7-13, 2018Receive this by email