The high-profile bank failures in March 2023 demonstrated that static measures of liquidity are not accurate representations of an institution’s true liquidity position. The ability to generate cash at a reasonable cost without loss of principal turned out to be the most important liquidity test. It’s time to revisit long-standing, past measures of liquidity and consider whether they continue to make sense in today’s banking environment.
As extensively evaluated in the white paper, Exposing the Fallacy of the Loan-to-Deposit/Share Ratio, the loan-to-deposit/share ratio has run its course as an appropriate liquidity metric. The industry is moving toward a more dynamic evaluation of liquidity that considers cash flows as they relate to the balance sheet and their role in an institution’s business plan or strategy. This is a shift away from ratio analysis as the predominant liquidity measure.
