The loans to total assets ratio (LA) is included to portray the balance sheet composition and is used as a proxy for capturing bank liquidity. Since loans, which typically represent a significant part of bank’s assets, are difficult to trade in a secondary market, they are the least liquid assets, after fixed assets, in a bank’s balance sheet. Hence, a high ratio of loans to total assets indicates a relative illiquid bank, whereas a low ratio indicates a bank characterized by excess stored liquidity (Panagiotis et al, 2007)
We use the ratio of loans to total assets (Loans/assets) to characterize the asset side of banks. Specifically, banks with higher values of Loans/assets are banks with a smaller portfolio of securities. If banks that held fewer loans had more credit-risky securities, we would expect these banks to have performed worse because of the increase in credit spreads that took place during the crisis. In contrast, banks that held government securities instead of loans would presumably have performed better (e.g., Beltratti and Stulz, forthcoming). Hence, the expected relation between Loans/assets and bank performance is unclear. (Aebi, 2012)