Bank A has a loan to deposit ratio of 75%, core deposits equal 62% of total assets and borrowed funds are 5% of assets. Bank B has a loan to deposit ratio of 82%. Core deposits are 55% of assets and borrowed funds are 20% of assets. Which bank has more liquidity risk? Ceteris paribus, which bank will probably be more profitable when interest rates are low and the economy is growing?

Question

Quizplus · Accepted Answer

Bank B has more liquidity risk due to a higher loan to deposit ratio and a higher percentage of borrowed funds. However, this also suggests Bank B might be more profitable in a low interest rate, growing economy due to higher interest income from loans and potentially higher leverage.

Bank a Has a Loan to Deposit Ratio of 75