Pre-Crisis and Post-Crisis Trust in Banks: Lessons from Transitional Countries

Trust in banks appears to be an essential element of well-functioning of macroeconomic systems, in general, and of financial markets, in particular. We study what factors determine the level of trust in banks before and after the 2007-08 financial crisis and how this crisis reshaped banking trust in 29 transitional countries. We find that younger, rural, educated, banked and generally trusting people tend to have higher confidence towards banks both in pre-crisis as well as post-crisis periods. Among country-level covariates, growth rate of GDP and Rule of Law remain positively and significantly associated with banking trust in both periods, while foreign bank participation starts to be detrimental to the trust after the crisis. In addition to ‘objective’ variables, we find that ‘subjective’ factors such as respondent’s personal experience with the crisis appear to strongly influence their trust in banks. Finally, after controlling for the “objective” variables, we find that the financial crisis has caused a decline in trust which is statistically significant but not dramatic or completely exceptional drop. Our findings indicate that the financial crisis has temporary impact on peoples’ trust in banks since pulling back the rate of GDP growth tends to fully recover banking trust in transitional countries.