Inverted U Dynamics in the Financial System: An Empirical Analysis on the Loan-to-Deposit Ratio and Interest Rates

Abstract

Purpose – This study investigates the nonlinear relationship between the Loan-to-Deposit Ratio (LDR) and various interest rates namely deposit, commercial loan, consumer loan, auto loan, and mortgage loan interest rates in the Turkish banking sector.
Design/methodology/approach – Using monthly data from June 2010 to February 2024, the analysis employs quadratic regression models inspired by the Environmental Kuznets Curve (EKC) framework, capturing the inverted U-shaped dynamic behavior of LDR over time.
Results – The results confirm that the LDR initially increases to a peak and subsequently declines, mirroring EKC patterns. Regression findings indicate that increases in interest rates significantly affect the LDR, with the consumer and deposit interest rates showing the strongest impacts. The stationarity of the regression residuals, tested via the Kapetanios, Shin, and Snell (KSS) nonlinear unit root test, supports the existence of long-term equilibrium relationships between LDR and interest rates.
Discussion – These findings provide valuable insights for financial policymakers aiming to design balanced credit and deposit strategies. In particular, it reveals that the system contains a turning point and exhibits high sensitivity to interest rates.