What is Ldr – Troubleinthepeace


Besides, Circular 13 has generated many lively debates on forums. Perhaps one of the most controversial issues is the ratio of credit to mobilized capital. Some comments suggest reviewing the structure of items belonging to the numeric element (credit) and also the denominator (capital mobilization)<1>; Others believe that the ratio of credit extension to mobilized capital is not in international practice (?)<2>. To find out the international practice of this ratio, the author has collected documents on the “Global Encyclopedia Library” (Internet) and also has obtained some relevant free materials, very preliminary and generalized to be able to share about this ratio.

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1. What is the ratio of credit to mobilized capital?

First of all, it can be confirmed with 100% confidence that the ratio of credit extension to mobilized capital is one of the safe ratios widely used by many countries in the world. In many countries, this ratio is used in the form of a loan-to-deposit ratio (loan-to-deposit ratio or credit/deposit ratio-LDR). Analysts and regulators regularly assess the bank’s ability to repay depositors and other creditors without incurring hefty costs, while maintaining capital growth. A bank’s so-called “liquidity” or “liquidity” is measured through a diverse set of tools and techniques, but the LDR ratio is one of the most widely recognized metrics. received the most attention.

The LDR ratio, as the name implies, is equal to total loans divided by total deposits – expressing the percentage of bank loans financed through deposits.

LDR = Total Loans/Total Deposits

An increase in the LDR ratio shows that banks are having less of a “cushion” to finance growth and protect themselves from the risk of sudden withdrawals, especially banks that rely too much on deposits. to finance growth. When the LDR ratio rises to a relatively high level, bank managers are less willing to lend and invest. Moreover, they will be cautious when LDR increases and requires credit tightening, so interest rates tend to go up. Although a high LDR ratio has never been quantified, it is a factor influencing investment and lending decisions.

The use of the loan-deposit relationship as a measure of liquidity is based on the premise that credit is the least flexible of a bank’s yielding assets. Therefore, when the LDR ratio increases, the bank’s liquidity decreases accordingly.

However, the LDR ratio still has certain limitations. First of all, it does not provide information about the maturity or nature of the loans. Assessing the liquidity of a loan requires information about its average maturity; whether the loan is amortized or a lump sum and information about the borrower’s credit history. Two banks with the same deposit base and LDR ratio can have very different liquidity if one bank has highly marketable loans, while the other has a lot of risky loans, long-term loans. The same is true for the bank deposit facility. Some deposit items such as long-term term deposits will be more stable than others, so the risk of deposit withdrawal will also be smaller. Second, the LDR ratio gives no idea as to the nature of the “yes” assets outside of the loan portfolio. A bank may have 20% of its deposits invested in short-term government securities, treasury; while, another bank may have the same ratio investing in stocks, corporate bonds, but both banks may have the same LDR ratio. Obviously these two banks will not share the same measure of liquidity. Third, recently, some analysts have argued that the LDR ratio does not convey as much useful information as it once did. For example, today it can be much easier for a bank to sell consumer loans or mortgage loans (through debt trading or securitization). Thus, a bank with a high LDR can easily make new loans by simply liquidating old loans. The Bank also has many new non-deposit sources (such as borrowing from the Central Bank), issuing high-value certificates of deposit (Negotiable CDs), repurchase agreements (Repurchase Agreements), capital sources provided by the Bank. US federal housing loans…) Furthermore, today, banks also have a variety of financial tools and techniques that allow them to better manage liquidity risk, despite relatively high LDRs. .

Despite its limitations, the LDR ratio still has certain values, that is, when the rate increases, it is a warning signal, prompting bank managers and supervisors to evaluate the entire program. its expansion. This is not a perfect measure of liquidity, but an approximation.

2. Some international practices on the LDR . ratio

South Korea: In the past few years, mortgage lending and lending to small and medium-sized enterprises (SMEs) have flourished, causing fierce competition among banks in credit activities. Since then, signs of liquidity instability of banks became permanent during the 2008 financial crisis. Although, the LDR ratio of domestic banks was around 100% at the end of 2004, but increased sharply between 2005 and 2007 and reached 127.1% at the end of 2007. However, under the constant direction of the supervisory authority to reduce the LDR rate from the second half of 2008, the LDR rate has decreased. down to 110.4% at the end of January 2010. (Table 1)

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In the 2010 Financial Policy Agenda published in December 2009, the FSC announced a plan to apply the LDR ratio as one of the mandatory liquidity ratios to improve the quality of corporate governance. value of banks and eliminate factors leading to unfair competition among banks in investment and lending activities. The proposed changes in the regulation will apply to commercial banks with loans exceeding 2 trillion won, including foreign bank branches. The LDR rate is calculated using the following formula, excluding certificates of deposit (CDs):

LDR = Loans in Won / Deposits in Won.

Deposits include: Demand deposits, savings deposits, and time deposits (data taken from the balance sheet).

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Banks must lower the LDR ratio below 100% by the end of 2013. State-owned policy banks such as the Industrial Bank of Korea, the Korea Development Bank and the Export-Import Bank of Korea do not accept this. governed by this provision. The new move of the Korean authorities is one of the efforts to respond to the call of regulators and supervisors on a global scale to tighten the supervision mechanism and minimize risks to the system. financial system.

“Regulating the LDR ratio will help domestic banks improve liquidity risk management capacity, and prevent excessive competition among banks in asset growth,” said Vice Chairman of the FSC Committee, Mr. Kwon Hyouk-se confirmed. “Because drastic implementation of this solution can have side effects such as cutting new loans, we will give banks a preparation period of four years,” he said.

Indonesia: Central Bank Indonesia has applied international standards since the early 1993, in which, the CAR ratio = 8%, the maximum LDR ratio is 110%. The maximum regulation on the LDR ratio was lifted in 2008 when banks faced liquidity difficulties due to the global financial crisis. During the period 1993 – 1997, the average LDR ratio of the banking system reached 80.5%. After the Asian financial crisis, the LDR ratio dropped sharply to about 35-40% in the early 2000s; Since 2004, the LDR ratio has shown signs of increasing again and reached about 73% at the end of 2009. The low LDR ratio is mainly due to the fact that commercial banks invest in bonds and central bank bills instead of accepting risks. risk to lend to companies. (Table2)

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China, Tanzania, Philippines, Bahrain, Qatar, Nepal:

Similarly, in the Philippines, Bahrain, the Central Bank requires banks to maintain a maximum LDR of 75%; Qatar: 95%; Nepal: LDR rates should not exceed 95% at the end of 2009, 85% at the end of 2010 and 80% at the end of 2011. (Table 3)

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Below is the evolution of LDR rates of some Asian countries from 1995 to 2004. (Tables 4 and 5)

Tables 4 and 5: LDR rates of some Asian countries in the period 1995-2004

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Through the chart, we see that, among Asian countries affected by the Asian financial crisis in 1997, the leading LDR ratio is the banking system of Korea and Malaysia with an LDR ratio of about 140% in 2004, a decrease of 20% from 160% in 1995 for South Korea and an increase of about 20% from 1995 for Malaysia. Singapore had an LDR ratio of about 120% in 2004, a decrease of about 15% compared to 1995. Among the four least developed economies in Asia, Cambodia, Laos, Myanmar and Vietnam, in 2001. – 2004, Vietnam is the country with the highest LDR rate, about 105% in 2004 and is on the rise.

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Table 6: Average LDR rates by income by country groups

Table 6 illustrates the average 2007 LDR rates for the four groups of countries by income and comparative data for Asia excluding Japan. At first glance, there seems to be some relationship, but not obvious, between income per capita and the LDR rate. In general, the LDR rate increases with per capita income. The average LDR for Asia excluding Japan fell in 2008, close to that of low-income countries.

3. Some comments

Thmost stasisLDR ratio is one of the liquidity ratios used quite commonly in many countries in the management and supervision of banking activities in order to improve the quality of liquidity risk management of banks, ensure ensure the stability and safety of the national financial system. Due to some limitations, the LDR ratio is used in conjunction with other liquidity ratios such as the Liquid Assets to Demand Liabilities Ratio. ratio of affordability in Circular 13; ratio of liquid assets to total assets, or total deposits (Liquid Assets to Total Assets/Deposits Ratio)…

Thsecond, on the composition of the items of the numerator and denominator in the LDR ratio. To calculate the LDR, each country has its own rules for calculating total loans (numerator) and total deposits (denominator), but most seem to have one thing in common: total loans include outstanding loans, financial leasing, discounting valuable papers. Total deposits include demand deposits, time deposits, savings deposits of customers. Some countries like South Korea exclude CDs from total deposits. It also makes sense to include the relatively complete denominator of deposits as the LDR rate’s name suggests, because in addition to the LDR rate, there are other required liquidity ratios.

Ththird, depending on the specific situation, countries have their own roadmap to apply the LDR rate. Korea has a 4-year roadmap to force banks to lower the LDR ratio, which is high in the region, to below 100% from the beginning of 2014. Nepal forces banks to lower the LDR ratio from 95% in 2009 to 85%. At the end of 2010 and 80% by the end of 2011. Meanwhile, Indonesia plans to force banks to raise the current low LDR ratio to a minimum of 75% and a maximum of 102% to promote credit growth, contributing to economic growth.

Wednesday, in the current Vietnamese market conditions, when commercial banks have been providing customers with products “term deposit, with early withdrawal of principal, high interest rate”, competitive attracting deposits with many sophisticated forms is still quite complicated, so the stability of deposits in general and term deposits in particular will be low; at the same time, it is not easy to liquidate, buy, sell, and securitize old loans. Therefore, in order to ensure liquidity, the LDR ratio should be regulated at a level lower than the actual industry average LDR established in recent years with reference to the experiences of other countries. Note that according to the statistical study of the group of GS. David G. Mayes (University of Auckland), Peter J. Morgan (ADB), Hank Lim (Research Director of Singapore Institute of International Studies) in March 2010 in the research project: “Deepening the Financial System” then the average LDR rate of Asia excluding Japan was 75% in 2008; The average LDR of low-income countries was only 60% in 2007.

When implementing Circular 13 of the State Bank, which contains regulations on LDR ratio, some commercial banks may face difficulties, these banks need to report separately to the State Bank and request disclosure of information. specific schedule and time for implementation. Considering the whole Vietnamese banking system, the contents of Circular 13 need to be implemented according to the roadmap.

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<1> Le Dac Cu: “Something to discuss more about the ratio of credit to mobilized capital”. Journal of Financial and Monetary Markets, No. 16/2010.

References:

1. Law on Commercial Banks of China

3. Bahrain to alter liquidity management regulation, Emirates Business. 24/7;

4. Edward W. Reed, Edward K.Gill “Commercial Bank”, City Publishing House. Ho Chi Minh, 1993.

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