Can the amount of loans and deposits in entire banking system differ significantly? When regarding the entire banking system, what factors impact the loans to deposits ratio? Is it roughly constant or can change dramatically? Dose the amount of nonperforming loans play a rule in its determination? Can a straightforward equation be drawn for difference between the amount of loans and deposits in entire banking sector by variable like money supply, base money etc.? Based on my understanding of money multiplier concept, there must be a one-to-one relationship between amount of loans and deposits in entire banking system and so the loan to deposit ratio must be roughly constant. Is it true?
The only thing we know for sure is that for banks, the two sides of the balance sheet balance. That is, assets = liabilities + equity.
In simplistic money multiplier discussions, the only bank assets are loans, the only liabilities are deposits, and there is no equity. So in that case, loans = deposits.
In the real world, equity is fairly small as a percentage. However, there are other large entries on the balance sheets.
- On the asset side, banks hold securities for liquidity management, have fixed assets (buildings and computers, etc.).
- Deposits are not the only liabilities (and we would need to distinguish between demand deposits and term deposits). Banks issue bonds and short-term debt.
As the mix of assets and liabilities change, so will the loan/deposit ratio.