Does Experience of Banking Crises Affect Trust in Banks?

Abstract

This paper investigates how past experience with banking crises influences an individual’s trust in banks. We combine data on banking crises for the period 1970–2014 with individual data on trust in banks for 52 countries. We find that experiencing a banking crisis diminishes a person’s trust in banks, and that length of the banking crises is negatively related to trust in banks. An individual’s age at the time of the crisis is important, and significant for individuals between 51 and 60 years of age at the time of the banking crisis. Both severe and mild crises diminish trust in banks, but banking crisis with larger impact on the real economy hits also young people’s trust, while less severe banking crises mainly degrade trust of more mature people. The detrimental effect for trust in banks seems to be connected specifically to systemic banking crises. Other types of financial crises incur no significant effect. Overall, our results indicate that banking crises generate previously unrecognized costs for the economy in the form of a lasting reduction of trust in banks.