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🔄 Utilization Rate

The degree of borrowing influences interest rates. This is called the "borrow demand." The greater the percentage of deposits loaned out, the more the interest rates rise. We refer to the degree of borrowing relative to the supply of borrowable funds as "utilization."

Utilization Calculation​

Utilization is typically calculated as:

UtilizationRate=TotalBorrowedTotalLiquidity∗100Utilization Rate = \frac{Total Borrowed}{Total Liquidity} * 100

It can be seen from the above formula that,

  • If there are no borrowers, utilization rate = 0%
  • If deposits are fully loaned out, utilization rate = 100%
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The value of utilization rate is used as the sole driver of interest rates

note

Borrow demand is relative to total deposits. If total deposits increase but borrow demand stays the same, utilization goes down.

When Utilization Rises (High demand for Borrowing)​

Borrow and supply interest rates increase, lending is incentivized & borrowing is disincentivized. This results in increasing idle liquidity, borrow demand falls, facilitating lowered utilization.

When Utilization Falls (Excess Idle Liquidity)​

Borrow and supply rates decrease. Borrowing is incentivized, lending is disincentivized. This results in decreasing idle liquidity, borrow demand rises and this facilitates higher utilization