Work

To give is to take: The effects of government deposits on bank risks

Year: 2025

Type: article

Abstract: As government and financial sector funds become increasingly intertwined, managing the influence of government deposits on the financial system has become an important way for preventing the escalation of bank risks. Using data of China’s city commercial banks from 2009 to 2017, we provide the first empirical test of the risk effects of government deposits and their transmission channels by employing a fixed-effects model and an instrumental variable approach. Our findings reveal that government deposits exert discernible credit allocation effects that exacerbate banks’ risks. Specifically, the risk exacerbation effects are shaped by credit expansion, policy-orientated loan, and credit term structure. By using a panel threshold model, we find that the impact of government deposits on bank risks exhibits clear threshold effects depending on banks’ equity assets and market environment. Furthermore, government deposits also influence banks’ revenue, and are impacted by the pace of government expenditure. Our paper sheds new light on the relationship between government and financial system in a broader context.

Source: International Review of Economics & Finance

DOI: 10.1016/j.iref.2025.104644

Authors: Xuanxuan Zhang, Jiefei Yang, Zhenzhen Li, Zili Zhang

Institutions: Capital University of Economics and Business, University of International Business and Economics, Zhejiang University of Finance and Economics

Language: English

Topic: Banking stability, regulation, efficiency

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: gold

Estimated APC paid: $1,930

Funders: Major Program of National Fund of Philosophy and Social Science of China, National Social Science Fund Youth Project, National Social Science Fund of China