Levy confirms trend towards more deposits

The world average loan-to-deposit ratio has fallen to 87.35% from close to 100% last year as deleveraging of the banking sector continues. One major impact of the financial crisis is the shift back to deposits as the major source of bank funding, and future regulation and taxation policies may push this trend along even further.

For example, the UK's announcement of a banking levy in its June budget statement will be based on a bank's liabilities minus Tier 1 capital, insured deposits and repo funding. Furthermore, the rate of taxation will halve on the remaining liabilities if they are financings of longer than a year.

This will push banks to raise more deposits to avoid the tax and to rely less on short-term capital markets fundraising to expand their balance sheets, an activity that got Northern Rock into trouble. French, German and US authorities are expected to follow suit with their own version of the banking levy.

Of all the regions, eastern Europe remains the most leveraged, with a loan-to-deposit ratio of 114.58%, and western Europe's is still high at 98.38%. For everywhere else, ratios are below 80%, with Asia's down from 85.04% last year to 77.61% this year. Latin America's fell even further from 105.71% (based on IMF data) to 73.24% and the Middle East similarly from 101.58% to 79.49%. North America's ratio fell from 100.29% to 79.45%, but Africa's rose slightly from 68.37% to 71.45%.

The table below, showing changes in the number of banks in each rank of loan to deposits, also illustrates the deleveraging trend. In all the categories over 100% there have been falls, with a large 12 percentage point fall from 29% to 17% in the 100% to 125% category. In the lowest rank showing loan-to-deposit ratios below 50% there was a 9 percentage point increase from 3% to 12%. The largest proportion of banks - roughly 40% - are in the 75% to 100% range, which denotes a bank actively lending but still amply covered with deposits.

This is probably the optimum ratio for banks and various banking reports have identified sectors with loan-to-deposit ratios exceeding 100% and expressed concern - suggesting that 100% should be the cut-off point. Regulators will no doubt be looking at this ratio very carefully in future.

Loan-to-deposit ratios by region 2009 (2008)

Loans to deposits ratio (%)