A macroprudential approach to address liquidity risk with the Loan-to-Deposit ratio

This paper maps the empirical features of the Loan-to-Deposit (LTD) ratio with an eye on using it in macroprudential policy to mitigate liquidity risk. We inspect the LTD trends and cycles of 11 euro area countries by filtering methods and analyze the interaction between loans and deposits. We propose that the trend of the LTD ratio is maintained within an upper and lower bound to avoid bad equilibria. To manage the LTD ratio between the boundaries we formulate two macroprudential rules. One that stimulates banks to issue retail deposits in an upturn and one that incentivizes banks to create loanable funds to support lending in a downturn, facilitated by a sufficiently long adjustment period.
 
Key words: Financial stability, Banks, Liquidity, Regulation.
JEL Codes: C15, E44, G21, G32, G28.

Working paper no. 372