Media sentiment, deposit stability and bank systemic risk: Evidence from China

Abstract

Using textual analysis techniques, we construct the unique bank-level media sentiment index in China with the data of news narratives to examine its driving effect on bank systemic risk with a distinction between systemic linkage and bank tail risk. We find consistent and robust evidence that negative media sentiment tends to increase market-data-based systemic risk measures. The withdrawal of deposits due to the negative media sentiment forces banks to raise interbank lending, which increases the cost of their liability and encourages them to engage in risky and similar business, in hence enlarging both bank tail risk and systemic linkage. We also find that the negative media sentiment of banks increases systemic risk, mainly by improving system linkage in the early stage, but mainly by improving bank tail risk in the later stage.