A bank’s liquidity measure that relates its liquid assets to its deposits. This ratio is an indicator of how much of its deposits a bank can quickly convert into cash. In other words, it indicates a bank’s liquidity level funded by deposits. A low ratio implies that the bank is susceptible to liquidity risk; whereas a high ratio signifies low interest margin, and hence a large impact on the key contributor to a bank’s profit.
This ratio reflects the capacity of a bank to cover and account for any unanticipated deposit withdrawal/ drain. According to empirical evidence, it has a positive impact a bank’s liquidity.
