What are Funding Volatility Ratio and Market Liability Ratio?

The volatility ratio (VR) is a statistical metric that measures the price changes of a security or market index over a period of time. It’s a technical analysis tool that helps investors and traders.

In banking parlance, volatile liabilities are ‘hot’ or ‘unstable’ funds that can disappear from bank’s balance sheet overnight. Demand deposits are best examples of volatile liabilities which can move out of the bank overnight.

Thus, funding volatility ratio (FVR) is calculated by proportion of liquid assets to CASA deposits i.e. FVR=Liquid assets÷ CASA deposits.

In case of Share market the measurement of volatility ratio helps investors follow the volatility of a stock’s price. The market experts normally use Schwager’s methodology for calculating the volatility ratio from the following.

Volatility Ratio = Today’s True Range÷ Average True Range of the Past N-Day Period

Where, today’s True Range = Maximum (Current Day’s High or Previous Day’s Close) – Minimum (Current Day’s Low or Previous Day’s Close)

Market Liability Ratio:  Market Liability ratio is a solvency ratio that measures the proportion of the Inter-bank and money market deposit liabilities to Average Total Assets.

In case of individuals, businesses the ‘Market liability ratio’ (Market debt ratio) is the  solvency ratio that measures the proportion of the book value of an entity’s debt to sum of the book of value of its debt and the market value of its equity which is calculated as under.

Market Debt Ratio = Total Liabilities÷ (Total Liabilities + Market Value of Equity)

A higher debt ratio (0.6 or higher) makes it more difficult to borrow money. Lenders often have debt ratio limits and do not extend further credit to firms that are over-leveraged.