Bank A has a loans/deposits ratio of 10%. Bank B has a loans/deposits ratio of 9

Question

Bank A has a loans/deposits ratio of 10%. Bank B has a loans/deposits ratio of 90%. Which of the following statements are true?

a. Bank A is better because it has lower liquidity risk.
b. Bank A is lending out a lot of its funding.
c. If Bank A is near its borrowing limit, it could lead to future liquidity problems.
d. A loans/deposits ratio shouldn’t be too low because then the bank isn’t making money, however a high ratio means there could be liquidity risk in the future.
e. None of the above.

Please explain concept. thanks

Explanation / Answer

Answer: D

As the main activity of any bank is to provide lend the money and earns the income in form of interest. So if the lending of any bank is low, it means that the bank is not lending the money which result in lower interest income and also on the other hand, if lending ratio is too high then in that case if depositor who deposits the money in bank if ask for withdrawl then in that case it will leads to liquidity problem in future.

In the give case, bank A's loan/deposit ratio is 10% which means bank is lending less and not making money and in case of bank B ratio is 90% which means there could be liquidity risk in future.

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