Seems to me the main constraint in the decentralized world is that the bank will have to pay higher interest to other banks, if their own loans start to default

Seems to me the main constraint in the decentralized world is that the bank will have to pay higher interest to other banks, if their own loans start to default at a greater rate than the money being deposited with them. If people stop depositing with that bank, or withdraw their money, or their loans start to default, then the bank's balance sheet will become lopsided and they'll have to pay higher interest to other banks. Is this what LIBOR is basically?