In Focus Consumer Credit
Trust in finance
A new study has shown the changing nature of trust in the American financial system
Peter Limbach University of Cologne – Centre for Financial Research
The level of trust among US finance professionals has declined far more sharply than among the general population over the past four decades, finds a new academic study that has implications for the effectiveness of huge COVID-19 (coronavirus) bailout programmes enacted by governments around the world. The study by academics in Germany and
the UK focuses on ‘generalised’ trust (trust in anonymous other people), and finds that the much greater decline in such trust among finance professionals is particularly strong in the investment sector and among professionals with higher seniority and influence. It is tied to a lack of trust only in institutions related to the finance industry. Simply put, while generalised trust has
declined in US society as a whole, it has declined significantly more across finance professionals. This relative decline in trust is unique to finance. While the research predates the COVID-
19 crisis, implications of the findings could complicate government efforts to implement credit programmes and other measures to combat the pandemic.
Raghavendra Rau University of Cambridge – Judge Business School
Any actions taken by central banks or
governments need to be trusted by the financial system in order for them to react appropriately by extending credit to the rest of the economy. Yet the paper finds that it is finance professionals who have particularly lost trust – significantly more than people working in major companies unrelated to finance, the executive branch of the federal government, and Congress. Such lack of trust is likely to have direct
consequences for the real economy: if banks do not trust their customers, they are unlikely to react to government actions by relaxing credit constraints, or relax them towards the ‘wrong’ customers. This was evident during the financial crisis, when despite declining interest costs the credit standards for subprime credit went down. Already, there has been a public
perception that banks have favoured their largest customers in implementing the Paycheck Protection Program in the US, which was designed to help struggling small businesses keep employees on the payroll. Companies are now racing for cash
because they think it unlikely that they will get financial help from intermediaries when they need it the most.
Already, there has been a public perception that banks have favoured their largest customers in implementing the Paycheck Protection Program in the US, which was designed to help struggling small businesses keep employees on the payroll
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Bailout programmes Economic bailout programmes enacted by governments to combat the coronavirus pandemic include a £330bn loan package in Britain and a $2.2tr relief package in the US that includes a $500bn lending programme for companies, cities and states, and $367bn for small businesses. The study is based on data from the
General Social Survey in the US over a 39- year period of 1978 to 2016, using survey responses from about 1,500 respondents
www.CCRMagazine.com
Henrik Schurmann BUW – Schumpeter School of Business and Economics, University of Wuppertal
each year to 1993 and 2,800 respondents every second year from 1994 to 2016. The study finds that aside from finance
professionals, no other professional groups show the same drop in trust relative to the general population. The authors attribute this steeper lack of
trust among finance professionals to three changes over recent decades: economic conditions that have differential effects on finance professionals, workplace composition among finance professionals, and fewer opportunities for human interaction among finance professionals. The study points out that trust, and the use
of similar implicit contracts in finance, often act as a substitute for explicit regulation. Given that most governments are providing coronavirus assistance with few mandatory requirements for recipients, this lack of trust among finance professionals could result in less of the bailout money going to intended recipients.
Worries This also causes worries about the potential misbehavior of finance professionals who will get massive amounts of money and have a responsibility to invest it in the right projects, particularly helping to relieve credit constraints. In simple terms, they have to provide a public good-like service and the basis for providing such a service is societal generalised trust. The authors also point out that the level
of generalised trust in finance is particularly important owing to the complexity of financial products, which creates an information asymmetry between finance professionals and clients that is higher than in most industries where the products are easier to understand. CCR
July 2020
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