Does the Past Haunt Us No More? How Proximity to Foreign Currency Lending Experience Affects Trust in the Banking System and Financial Literacy

Abstract

While FX lending is often the focus of analyses on non-performing loans and postcrisis debt relief measures, its effect on debtors’ subsequent behaviour and attitudes has been addressed to a far lesser extent in the research in recent years. In our study, we seek to fill this gap by examining the effect of proximity to foreign currency lending experience on an individual’s trust in the banking system, and financial literacy. For our study, we relied on data from a CATI survey conducted on behalf of the MNB, the central bank of Hungary, in September 2021. The sample of 1,001 respondents represents the Hungarian adult population in terms of gender, age, type of municipality, region and educational level. In addition to the proximity to foreign currency lending experience, modelling controls included sociodemographic variables on the one hand, and variables related to borrowing on the other. The effect of proximity to foreign currency lending experience was examined in terms of both trust in the banking system and components of financial literacy. The effect was quantified using a linear regression model based on OLS estimation. According to our estimate, the role of proximity to foreign currency lending experience is less important than expected. Closer proximity to foreign currency lending experience has no apparent effect on a borrower’s overall trust in banks operating in Hungary. At the same time, proximity to foreign currency lending experience increases the likelihood of the respondent’s belief that a bank acts in bad faith (exploiting legal loopholes). Among the components of financial literacy, it plays a significant role only in financial knowledge, i.e. controlled for other factors, closer proximity on average increases financial knowledge. Conversely, it fails to influence, in any manner, the adoption of more conscious attitude, behaviour and practices.