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Trust in Lending

Author

Listed:
  • Richard T. Thakor
  • Robert C. Merton

Abstract

We develop a theory of trust in lending, distinguishing between trust and reputation, and use it to analyze the competitive interactions between banks and non-bank lenders (fintech firms). Trust enables lenders to have assured access to financing, whereas a loss of investor trust makes this access conditional on market conditions and lender reputation. Banks endogenously have stronger incentives to maintain trust. When borrower defaults erode trust in lenders, banks are able to survive the erosion of trust when fintech lenders do not. Trust is also asymmetric in nature—it is more difficult to gain it than to lose it.

Suggested Citation

  • Richard T. Thakor & Robert C. Merton, 2018. "Trust in Lending," NBER Working Papers 24778, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:24778
    Note: CF ME
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    File URL: http://www.nber.org/papers/w24778.pdf
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    Citations

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    Cited by:

    1. Jorge Padilla, 2020. "Big Tech “banks”, financial stability and regulation," Revista de Estabilidad Financiera, Banco de España, issue Spring.
    2. Ping-Lun Tseng & Wen-Chung Guo, 2022. "Fintech, Credit Market Competition, and Bank Asset Quality," Journal of Financial Services Research, Springer;Western Finance Association, vol. 61(3), pages 285-318, June.
    3. Serena Gallo, 2021. "Fintech platforms: Lax or careful borrowers’ screening?," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 7(1), pages 1-33, December.
    4. Thakor, Anjan V., 2020. "Fintech and banking: What do we know?," Journal of Financial Intermediation, Elsevier, vol. 41(C).
    5. Chin‐Yoong Wong & Yoke‐Kee Eng, 2020. "P2P finance and the effectiveness of monetary controls," Manchester School, University of Manchester, vol. 88(4), pages 617-639, July.
    6. Ghosh, Saibal, 2021. "How important is trust in driving financial inclusion?," Journal of Behavioral and Experimental Finance, Elsevier, vol. 30(C).
    7. Barth, Andreas & Mansouri, Sasan, 2021. "Corporate culture and banking," Journal of Economic Behavior & Organization, Elsevier, vol. 186(C), pages 46-75.
    8. Wang, Yao & Drabek, Zdenek & Wang, Zhengwei, 2022. "The role of social and psychological related soft information in credit analysis: Evidence from a Fintech Company," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 96(C).
    9. Jin, Justin Y. & Kanagaretnam, Kiridaran & Wang, Wenting, 2020. "Societal trust and banks’ funding structure," Journal of Behavioral and Experimental Finance, Elsevier, vol. 27(C).
    10. Boot, Arnoud & Hoffmann, Peter & Laeven, Luc & Ratnovski, Lev, 2021. "Fintech: what’s old, what’s new?," Journal of Financial Stability, Elsevier, vol. 53(C).
    11. Eunjung Yeo & Jooyong Jun, 2020. "Peer-to-Peer Lending and Bank Risks: A Closer Look," Sustainability, MDPI, vol. 12(15), pages 1-17, July.

    More about this item

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • H12 - Public Economics - - Structure and Scope of Government - - - Crisis Management
    • H81 - Public Economics - - Miscellaneous Issues - - - Governmental Loans; Loan Guarantees; Credits; Grants; Bailouts

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