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Trust in Banks? Evidence from normal times and from times of crises

Trust in financial institutions is of great importance for financial intermediation. Against this background, we study two questions: Has trust in banks declined during the global financial crisis and what factors determine the level of trust in banks? Employing survey evidence from Austrian households, we show that trust in banks is mainly affected by "subjective" variables like the individuals' assessment of the current economic and financial situation and by their future outlooks. After controlling for these variables we show that the financial crisis has caused a reduction in trust (around -7.5pp) which is sizable but not dramatic. Even at its lowest point (in the first quarter of 2009) 65% still report to have trust in the banking system, which is a higher percentage than for many other institutions. Furthermore, the drop is only slightly larger than the drop observed after a small, non-systemic crisis that occurred in 2006. Thus, the much-stressed notion of a genuine "trust crisis" is not reflected in our data. Finally, we provide evidence that the degree of individual information does not influence trust, that banking trust is contagious and that the extension of deposit insurance coverage in October 2008 had a positive effect on trust.

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File URL: https://www.oenb.at/dms/oenb/Publikationen/Volkswirtschaft/Working-Papers/2009/Working-Paper-158/fullversion/wp158_tcm16-143616.pdf
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Paper provided by Oesterreichische Nationalbank (Austrian Central Bank) in its series Working Papers with number 158.

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Length: 49
Date of creation: 10 Nov 2009
Date of revision:
Handle: RePEc:onb:oenbwp:158
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  1. Alesina, Alberto & La Ferrara, Eliana, 2002. "Who trusts others?," Journal of Public Economics, Elsevier, vol. 85(2), pages 207-234, August.
  2. Rajkamal Iyer & Manju Puri, 2008. "Understanding bank runs: the importance of depositor-bank relationships and networks," Proceedings 1095, Federal Reserve Bank of Chicago.
  3. Luigi Guiso & Paola Sapienza & Luigi Zingales, 2008. "Trusting the Stock Market," Journal of Finance, American Finance Association, vol. 63(6), pages 2557-2600, December.
  4. Calderon, Cesar & Chong, Alberto & Galindo, Arturo, 2002. "Development and Efficiency of the Financial Sector and Links with Trust: Cross-Country Evidence," Economic Development and Cultural Change, University of Chicago Press, vol. 51(1), pages 189-204, October.
  5. Rainer, Helmut & Siedler, Thomas, 2009. "Does democracy foster trust?," Journal of Comparative Economics, Elsevier, vol. 37(2), pages 251-269, June.
  6. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "This Time Is Different: Eight Centuries of Financial Folly," Economics Books, Princeton University Press, edition 1, volume 1, number 8973.
  7. John Hudson, 2006. "Institutional Trust and Subjective Well-Being across the EU," Kyklos, Wiley Blackwell, vol. 59(1), pages 43-62, 02.
  8. Rafael La Porta & Florencio Lopez-de-Silane & Andrei Shleifer & Robert W. Vishny, 1996. "Trust in Large Organizations," NBER Working Papers 5864, National Bureau of Economic Research, Inc.
  9. Justina Fischer & Volker Hahn, 2008. "Determinants of Trust in the European Central Bank," TWI Research Paper Series 26, Thurgauer Wirtschaftsinstitut, Universit�t Konstanz.
  10. Carlin, Bruce Ian & Dorobantu, Florin & Viswanathan, S., 2009. "Public trust, the law, and financial investment," Journal of Financial Economics, Elsevier, vol. 92(3), pages 321-341, June.
  11. Robert Mosch & Henri�tte Prast, 2008. "Confidence and trust: empirical investigations for the Netherlands and the financial sector," DNB Occasional Studies 602, Netherlands Central Bank, Research Department.
  12. Philippe Aghion & Yann Algan & Pierre Cahuc & Andrei Shleifer, 2010. "Regulation and Distrust," Sciences Po publications info:hdl:2441/4km7l02j139, Sciences Po.
  13. Luigi Guiso & Paola Sapienza & Luigi Zingales, 2004. "The Role of Social Capital in Financial Development," American Economic Review, American Economic Association, vol. 94(3), pages 526-556, June.
  14. Knack, Stephen & Keefer, Philip, 1997. "Does Social Capital Have an Economic Payoff? A Cross-Country Investigation," The Quarterly Journal of Economics, MIT Press, vol. 112(4), pages 1251-88, November.
  15. Rajkamal Iyer & Manju Puri, 2008. "Understanding Bank Runs: The Importance of Depositor-Bank Relationships and Networks," NBER Working Papers 14280, National Bureau of Economic Research, Inc.
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