The professional looks and taste is just best for those who have a career in the bank industry because they are among those who have the most difficult jobs. In fact, they are actually working on double tasks—customer service representatives of the bank and financial computers of the banks clienteles.
On top of that are the many formulas that they need to memorize in able to come up with the most accurate computations that their clienteles need. Aside from those is the in-bank computation that they need to do in order to render their company effective or profitable.
Now, these are very critical computations and they need to be properly addressed or the bank is at risk of misleading their members.
Among the most important but highly critical computations that a bank needs is the loan to deposit ratio. This computation is basically the bank’s loaned amounts divided by the deposited amounts without time consideration.
Importance of loan to deposit ratio
The loan to deposit ratio is important in identifying the risk of the bank is taking. When the ratio is high, this means that the bank is relying heavily on borrowed funds and thereby is generally risky.
This is easy to identify, though even without the ratio. In case the amount of loans is higher than the deposit, the bank is going through high risks. The otherwise is true if the values are reverted.
What does high loan to deposit ratio means
Banking with a finance institution that has very high loan to deposit ratio is a bit scary. You see, this means that the bank is loaning away most of its depositor’s money. With that, you can rest assured that there is a huge tendency that these loans can become bad loans and the result would be truly worrisome for you.
For borrowers, banks with quite high loan to deposit ratio is going to be not as worrisome. There is no risk for them because they are the ones who owe the bank money, which is not actually the bank’s money but its depositors’ money.
Simply put, in case the bank declares bankruptcy or the like, the people who have loans can simply file bankruptcy as well. The depositors, on the other hand, are at the losing end because the bank will only take care of part of their deposits and nothing more.
How do you know if your bank has a high loan to deposit ratio
Most financial situations affecting the trust and confidence of bank depositors are generally kept from the prying eyes of the media, so you can expect that you may be the last person to know if the bank you are with is already losing its edge.
But there is always a way on how you can find information like this about your bank. Basically, it is supposed to be available on the site of your bank although it is kept low to prevent panic among depositors and investors.
There is also an alternative in looking for this kind of information in case you are having a difficult time looking for the current financial situation of your bank.
Federal laws and government financial authorities are provided with reports regarding this by banks, including the bank you are depositing your money. All you have to do is check out the news page of these institutions or you can even ask for information as long as you can back up your queries.
But more importantly, banks do provide information such as this to their clientele. You should be provided with this information and report at least quarterly if annually is not possible.
If this doesn’t happen, you can ask for copy to be furnished for your own use. You can do that through your banking personnel or the manager, whoever is available for your request.
In all occasions, loan to deposit ratio is supposed to be known to you because this is what will guarantee the performance of the bank and what you can expect from it while your money is left in a particular bank. Once the result of this ratio is too high, you need to be very cautious regarding your money and investment. This means that the bank has already put out so much money investing on loans and the likes.
That puts you on the bad side as a depositor because your money is already out to lending schemes. If the bank declares bankruptcy in the future, you will just be able to take back a portion of your investment and money while the bank has the opportunity to go after those they lent money to even after going off the business.
For best results and healthy banking purposes, make sure that you are well informed regarding these things.