Using Loan-to-Deposit Ratio to Avert Liquidity Risk: A Case of 2008 Liquidity Crisis

Abstract

Liquidity risk is an on-going issue since the emergence of liquidity crisis of 2008. This paper aims to contribute to the discussion on how Loan-to-Deposit (LTD) ratio can be used to investigate and avert liquidity problem in the banking sector. For this purpose, the data of Major British Banking Groups (MBBG) are collected and critically analysed. The findings of the study reveal that the banks which sustain the LTD ratio were able to successfully pass through the liquidity crisis of 2008, and other banks which rely more on borrowed funds or banks with increasing LTD ratio, became the victim of financial crisis.

Keywords: Liquidity crisis, Loan-to-Deposit ratio, LTD, solvency, financial crisis, UK banking sector