Loan:Deposit Ratio Illustration

Loan:Deposit Ratio Walk-through

Let’s compare the loan:deposit ratios of three of the biggest banks in the US, versus three of the biggest banks operating in the UK today. Banks in the UK have consistently higher loan:deposit ratios than US banks.

United States		United Kingdom
JPM	64%	Lloyds	108%
BoA	72%	Barclays UK	95%
Wells Fargo	74%	RBS	89%

The US banks originate retail mortgages through their branch networks, but once those mortgages have been agreed the banks have been able to sell many of these mortgages to the state-backed US mortgage Agencies. This means their asset bases are artificially smaller, because they don’t keep hold of all of their customer mortgages. UK banks, on the other hand, have no access to such mortgage Agencies and therefore keep their mortgages on their balance sheets, recording them as assets. Now let’s look at the loan:deposit ratios of the biggest banks in Japan and Sweden. The Japanese economy has been shrinking, there are negative policy rates and the existence of the “lost decade” suppresses loan growth. This holds down the asset side of these banks’ balance sheets and pushes a Japanese bank’s loan:deposit ratio lower. Now consider that Japan is still an exceptionally wealthy country and this results in large deposits. This large base of customer deposits also acts to push the loan:deposit ratio of the big banks lower.

Japan		Sweden
SMBC	57%	Swedbank	167%
MUFG	61%	Nordea	179%
Mizuho	64%	Handelsbanken	143%

At first glance, the loan:deposit ratios of Swedish banks are through the roof. The answer lies on the liability side of the balance sheet, and how Swedish banks raise liabilities. Swedish consumers don’t tend to open savings accounts with their banks, instead their habit is to place their savings in mutual funds. These funds then invest their customers’ cash in the wholesale debt of the domestic banks, usually in the form of covered bonds. These are therefore classed as wholesale borrowing, and therefore inflate the liability component of the loan:deposit equation.