Interbank deposits and bank systemic risk

We examine the comprehensive causal impact of interbank deposits on bank systemic risk by using an international sample of Group of Twenty (G20) listed banks. Using the global wage direct deposit policy as an exogenous shock to interbank deposits, we find that higher interbank deposits result in greater bank systemic risk. A series of instrumental variable approaches, entropy-balanced method, and persistence tests further confirm our findings. Moreover, we document that interbank deposits influence systemic risk through two channels: interbank network linkages and bank risk-taking. Our study holds significant implications for both macro- and micro-prudential regulatory policies as it highlights the often-overlooked adverse impact of interbank deposits, which only a few countries incorporate into their prudential regulatory frameworks. •This paper examines the causal relationship between interbank deposits and bank systemic risk.•Banks with higher interbank deposits are associated with greater systemic risk.•Bank risk-taking and network centralityare the mechanisms through which interbank deposits increase bank systemic risk.