How Banks Determine the Deposits Times Capital
An effective way to determine the number of times over total equity that deposits cover is to calculate deposits times capital. Deposits are the primary way a bank borrows money. A customer deposits money, and the bank must pay that money back on request with interest.
The primary difference between deposits and the loans taken by any other corporation is that deposits are loans that must be repaid on request and are often subject to cyclical fluctuations. Here’s how to calculate deposits times capital:
Use these steps to work through this equation:
Use the income statement from the current year and previous year to calculate the average deposits:
Add the deposits from the current year and previous year and divide the answer by 2.
Use the balance sheets from the current year and previous year to calculate the average stockholders’ equity:
Add the stockholders’ equity from the current year and previous year and divide the answer by 2.
Divide the average deposits by the average stockholders’ equity to calculate the deposits times capital.
This ratio is similar to the debt to equity ratio in that it can provide an idea of whether the bank’s earnings may be volatile or the bank itself may be at risk of insolvency as a result of extremely high interest expense and account withdrawals.