For a DI, what does a high ratio of loans to deposits indicate?

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BlackTom AI · Accepted Answer

This item provides a question about what a high loan-to-deposits ratio indicates for a DI, but the list of answer options is missing in the data you supplied. Nevertheless, we can reason about the concept and why the given correct option would be reasonable in this context.

Conceptual basis: A high ratio of loans to deposits means that the institution is lending out a large portion of its available deposits relative to its deposits, which typically requires the bank or DI to seek funds from sources other than customer deposits to cover new loan originations. The greater the reliance on non-deposit funding, the more exposed the institution is to funding and liquidity risks.

Why the (provided) correct option plausibly fits: If the statement for option E is "DI relies heavily on the short-term money market to fund loans," this aligns with the typical interpretation that high loan-to-deposit ratios push a DI to rely on wholesale funding and short-term money market instruments (such as repo, Fed funds, commercial paper, or other short-term borrowings) to bridge funding gaps for loan growth. This reliance increases liquidity risk and interest-rate risk, since wholesale funding can be more volatile and sensitive to market conditions than core customer deposits.

Why other options (if they existed) might be considered incorrect generally in this context:
- An option suggesting that high loan-to-deposit ratios imply funding exclusively from deposits would be inaccurate, as deposits are precisely what get stretched when lending out a large share of funds.
- An option stating no risk or reduced risk from going above a certain ratio would be misleading, because higher reliance on short-term funding typically elevates liquidity risk and rollover risk.
- Any claim that the ratio only reflects asset quality or loan performance (without linking to funding sources) would misattribute the indicator, since loan-to-deposit is primarily a funding/liquidity metric rather than a direct measure of asset quality.

In summary, the core implication of a high loan-to-deposit ratio is increased dependence on short-term or wholesale funding sources to support loan growth, which corresponds to the concept described in option E. If you can share the full list of answer options, I can map each option precisely to these explanations and highlight why E is correct among them.

FINS5530-Financial Institution Mgmt - T2 2025

For a DI, what does a high ratio of loans to deposits indicate?

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