When the economy expands or contracts, loan growth and share growth have historically had an inverse relationship. In times of economic prosperity, consumers are more confident and in turn take out more and larger loans. During periods of economic contraction, consumers seek safe havens for their savings in lieu of leverage.
In simple terms, the loan-to-share ratio can be used to assess how effectively an institution is deploying its balance sheet. A rising ratio signals that loan growth is outpacing deposit growth. As loan-to-share ratios approach 100%, institutions will commonly seek additional sources of liquidity (borrowings), sell loans off their balance, or tighten lending criteria to slow additional future loan growth.
Over the past five years, the average credit union loan-to-share ratio has increased 15.5 percentage points. In the second quarter of 2018 quarter alone, it has increased 2.3 percentage points, reaching 82.9%, and remains only 86 basis points below the record high reached in September 2008 of 83.7%.
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