Trust in Banks

I talk a lot about trust. As someone who’s studies behavior, I take a special interest in how trust can affect decision-making. This has come up in my posts about the use of cash, the use of credit, and the use of banking services.  If people don’t trust banks, then our financial infrastructure has a serious problem.  The fractional reserve banking system is built on the idea of the money multiplier. If people don’t trust banks enough to keep the optimal amount of money in depository institutions, growth will not meet expectations.

Since I believe that this trust has substantially deteriorated since the financial crisis in 2008, I also think that major macroeconomic models are in need of  re-calibration/revamping to accommodate for this. I am personally convinced that people have changed the way that they view banks, financial institutions, and the government. More importantly, I believe that this has affected behavior in a significant way. People are holding onto more liquidity. People aren’t spending as much. New innovations in technology and banking like marketplace lending and apps such as Venmo are changing the way people handle their money and relate to traditional banks. After mulling over this, I wondered, is there evidence to support it?

Economists love indicators. They rely on standardized measures like the unemployment rate (U3), the CPI, GDP etc. to gauge how the economy is faring. Since trust is so important, there must be something measuring it. Unfortunately, this isn’t really the case.

I poked around as much as I could and found a few things that attempt to capture this. First, a study from Ernst & Young in 2014. They surveyed 32,642 retails banking customers in 43 countries, so this one isn’t specific to the U.S. (though you can filter on specific countries in the results) They found that 16% in the U.S. have increased their confidence in banks over the past 12 months, compared with 33% globally. In the U.S. 47% have complete trust and 45% have moderate trust in their financial institution (compared with 44% and 49% globally, respectively). They also found that trust is “most frequently associated with the stability of the institution and the customer experience, with ‘the way I am treated’ being of great importance.” This report is very informative and thorough, but unfortunately it doesn’t leave any room to benchmark since it isn’t a regular annual thing.

I also found a Gallup poll , most recently taken in the summer of 2015. It was a random sample of 1,527 adults, aged 18 and older, living in all 50 U.S. states and the District of Columbia and asked the following:

“Now I am going to read you a list of institutions in American society. Please tell me how much confidence you, yourself, have in each one — a great deal, quite a lot, some or very little?”

The percent that selected a great deal/quite a lot for banks peaked in 1979 at 60%, then  dropped from about 50% in 2006 to 22% in 2009. It has since edged back up to 28% as of 2015.

Another is the Edelman Trust Barometer. Edelman is a public relations/communications firm and they put out this survey annually. It measures trust in government, business, NGOs, and media, with financial services being an industry within business. So, it doesn’t focus on banks specifically, but it does yield some insights.  Namely, trust in the financial service sector has risen from 43% in 2012 to 51% in 2016, which is the highest level since before the recession. Again, this is a global survey and in this case we can’t pull out the U.S. specific results.

Lastly, the most promising thing I encountered is the Financial Trust Index from the Chicago Booth School/Kellogg.  It was put together by Luigi Zingales and Paolo Sapienza who are both finance professors.  The authors define trust as “an expectation that a person (or institution) will perform actions that are beneficial or at least not detrimental to others.” The data is collected on a quarterly basis, randomly chosen from more than 1,000 American households,  and surveyed via phone by Social Science Research Solutions. Unfortunately, there’s not a anymore information about how the index is calculated.

The most recent findings, as of 2015 divide the results into credit unions, local banks, national banks, and banks in which the govt has a stake. For banks overall, trust was highest (history from 2009-2015) in 2010 with about 43% trusting banks. It reached a nadir in 2012 with about 28% trusting banks and has since increased, returning to around 43%. Trust is higher for credit unions and local banks and lower for banks in which the government has a stake.

Overall, these measure are pretty consistent, which is encouraging. They all estimate that about 40-50% of people “trust” banks as of 2014-2016.  Trust is loosely defined though. And even though the consistency is encouraging, the levels are not. Half may seem like a lot, but considering that this is an industry that a minimum of 90% of consumers are in business with the in the U.S., a little more confidence would be nice.

Personally, I would like to see a more consistent measure of this being taken on a regular basis and incorporated into policy decisions. Most policies focus on unemployment, inflation, interest rates, and consumer spending. That’s all fine and good, but it doesn’t tell us much about how people feel. There are some indicators that touch on this,  the most widely accepted being the University of Michigan Consumer Sentiment Index and the Consumer Confidence Index. This article touches a bit upon how they can be used from a policy standpoint, and interestingly suggests that there may be differences in how people report confidence between political and non-political surveys. While these indicators are both helpful and provide relevant information that is often used by policymakers (though they faced a lot of resistance early on), they don’t actually touch on the topic of trust. This was surprising to me.  If you read the fine print on the surveys and results, you see that they ask all sorts of questions about how people expect their financial conditions to change with respect to the job market, prices, savings etc. This doesn’t address financial stability as a whole, though.  Asking someone a question like :

“And how about a year from now, do you expect that in the country as a whole business conditions will be better, or worse than they are at present, or just about the same?”
is obviously not an exact science and certainly leaves plenty of room for interpretation. My aim is not to criticize these surveys, but to point out that there might be more targeted information they could be extracting. For example, why not add a question like “Do you expect your bank/financial institution to act within your best interest” or “When you put a deposit in the bank, do you fully expect to be able to retrieve it at will?” These might lead to insights about consumer spending, savings, liquidity, price stickiness etc.
Trust is important. It doesn’t even take getting through Psych 101 to know that whether or not you trust a person affects your relationship with them in a very real way. Why should economists assume that our relationships with banks are any different?









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