Trust in banks

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Trust in banks

  1. 1. Trust in Banks and Implications for Savings Behaviour Tom Coupé Kyiv School of Economics www.kse.org.ua
  2. 2. The Importance of Trust• Mark Carney: “The lack of trust in major banking systems "deepened the cost of the crisis and is restraining the pace of recovery”… Reduced trust in the financial system has increased the cost and lowered the availability of capital for non-financial firms, with access to credit remaining strained despite the massive response of central banks, he said.”• http://uk.reuters.com/article/2013/02/25/uk-economy-bankofcanada- idUKBRE91O0TG20130225
  3. 3. “NBU: Ukrainians trust banks”“Trust of the Ukrainians in the banking system has increasedannually …. head of the NBU department … told a round table,ForUm correspondent reports.”"The phrase that people do not trust in banks is one of thehogwashes. The figures prove us that population trusts in thebanking system, because citizens get salaries through banks, sendfunds, open deposits and take credits".• http://en.for-ua.com/news/2012/12/13/161033.html
  4. 4. Outline• Trust in Banks – an introduction – An international comparison of the trust in banks – Some details on Ukraine – What can explain the variation in trust over countries?• Mattresses versus Banks – Can lack of trust explain why Ukrainians save under the Mattress?
  5. 5. Confidence in Financial Institutions(Gallup,2009)
  6. 6. Lesson I• Lots of variation over countries• Ukraine scores really bad• Source: https://worldview.gallup.com/default.aspx
  7. 7. Trust in Banks and Financial Institutions (LITS,2006)
  8. 8. Trust in Banks and Financial Institutions (LITS, 2010)0.80.70.60.50.4 no trust0.3 trust0.20.1 0
  9. 9. Razumkov Center Poll• Ukraine, poll_ Do you trust commercial banks_ (recurrent, 2009-2011) __ Razumkov Centre.pdf
  10. 10. Macro Lessons• Lots of variation over countries• Ukraine scores really bad• Changes over time in Ukraine• Sources:• http://www.ebrd.com/pages/research/analysis/publications/transition.shtml• http://www.ebrd.com/pages/research/publications/special/transitionII.shtml
  11. 11. GFK - Trust towards different institutions: dynamics In 2007 the trust to banks was higher than to militia. It was then followed by sharp decline in 2008. In 2009 the trust to banks is gradually reviving60 57 56 55 September 2007 November 2008 March 2009 September 2009 545040 3430 28 28 27 25 22 20 2020 17 17 16 15 15 14 14 14 13 13 11 11 11 11 1010 9 9 9 9 9 8 8 8 8 7 6 6 6 5 5 5 5 4 4 3 3 0 Church Army Local Militia Banks Foreign Ukrainian Insurance President of Government Political Verhovna authorities owned owned companies Ukraine parties Rada companies companies
  12. 12. Macro Lessons• Lots of variation over countries• Ukraine scores really bad• Changes over time in Ukraine• In Ukraine, little trust in any institution• Why determines trust?
  13. 13. Literature• Mosh and Prast (2008) – Netherlands• Knell and Sixt (2009) – Austria• Mudd and Nalev(2009) – Hungary• Stevenson and Wolfers (2011)
  14. 14. Confidence in National Banks• Ehrmann et al (2012)• Macro – Unemployment – Inflation – Lower stock returns• Micro – “Results indicate that respondents are more likely to trust the ECB if they are male, older, married, with higher education and have a centre-right political orientation” – Knowledge about the Central Bank
  15. 15. Confidence In National Government (Gallup 2009)
  16. 16. 100 80 60Rep. 40 20 0 0 20 40 60 80 100 confidence in government
  17. 17. What Explains The Variation in Trust in Banks overCountries?• Institutional framework
  18. 18. What Explains The Variation in Trust in Banks overCountries?• Institutional framework• Historical trauma
  19. 19. Trust and Economic Growth100 80 60 40 20 0 -10 0 10 20 growthbefore
  20. 20. What Explains The Variation in Trust in Banks overCountries?• Institutional framework• Historical trauma• Economic Situation
  21. 21. Regulation 100 80overall % yes 60 40 20 0 5 10 15 restrictions
  22. 22. What Explains The Variation in Trust in Banks overCountries?• Institutional framework• Historical trauma• Economic Situation• Regulation?
  23. 23. Summarizing So far• Lots of Variation in Trust, Ukraine scores particularly bad• Trust in banks can (?) be supported through – Improved institutional environment – Avoiding „trauma‟ (credible deposit insurance) – Economic success – Regulation?
  24. 24. Why does it Matter? GFK - Overall importance: dynamics% of all respondents, September 2008 (N=1000); March 2009 (N=1000); September 2009 (N=1000). 53 Reliable, stable bank 63 62 44 Good tariffs and interest rates 43 49 17 Long time on the market 24 25 24 Convenient location of the bank office 20 23 18 Positive experience in using the bank services 23 22 19 Recommendations of my friends or relatives 18 18 23 Wide network of branches and ATMs 15 16 12 The bank is the market leader 15 15 12 One can get the bank services easy and fast 10 13 15 Polite and qualified staff 12 September 2008 11 15 Bank offers the product which meets my needs at maximum 12 11 March 2009 11 Ukrainian bank 11 8 11 September 2009 Being personally acquainted with someone from the bank staff 9 8 10 Simple and clear products of the bank 10 7 5 Foreign bank 4 5 3 Recommendations of my employer 5 3 1 Attractive and tidy bank branch offices 1 1 1 Access to personal account and performing operations via the Internet 1 1 0.5 Bank services and advertising 0.4 1 1 Attractive logo / image of the bank 0.1 0.2 1 Hard to say 2 0.4
  25. 25. Reasons for starting relations with banks (GFK)% of those, who started relationship with banks, N (2011Q1) = 452*, N (2011Q2) = 566 26 Trust in this bank 24 It is decision of 14 my employer 21 Convenient 19 location of bank branch 21 Other attractive 19 2011Q1 banking services (not rates) 14 2011Q2 11 High quality of services 13 12 Attractive rates 12 3 Other 6 *Alternative was added to questionaire in February 2011.
  26. 26. Trust and Deposit flows
  27. 27. Global Findex Survey – Ukraine (WB, 2011)No Account, because:
  28. 28. Literature• Trust and finance – Djankov et al (2008) – Mexico – Osili and Paulson (2008) – US – Guiso et al. (2008) – effect on stock market• Mattress Saving – Guiso et al. (2004) - Italy
  29. 29. Data• 2010 FINREP – USAID survey on pension reforms• “Could you, please, tell whether you personally, not a member of your family, are using any of these methods of saving and augmenting money now?”• Source:http://www.finrep.kiev.ua/download/pension_survey_22jul2010_en.pdf
  30. 30. Table 1: Methods of saving, current and planned.Method of Saving Now PlannedSaving in cash in the Hryvnia 41.06 40.96Saving in cash in foreign currency 12.01 17.99Bank deposits (time deposits) and saving accounts 6.73 8.37Payment cards and current accounts 12.41 8.57Banking (precious) metals or deposits in precious metals 0.10 0.60Payments to Credit union 0.25 0.25Participation in non-state pension funds 0.20 0.75Participation in investment funds 0.15 0.25Investment in shares and bonds of enterprises 0.10 0.35Investment in state securities 0.05 0.20insurance policy 0.80 1.15Purchase of real estate as investment 2.19 5.38Lending money to other people at interest 0.65 0.70Precious metals 1.35 2.09Plots of land 2.59 4.73Numbers in the table are the percentages of respondents selecting a specific method.
  31. 31. Banks versus Mattresses Share Number of ObservationsCash Only 67.84 751 Deposits Only 4.88 54 Current Account Only 12.20 135 Current and Deposit Account 0.99 11Banks Only 18.07 200 Cash & Deposits 4.79 53 Cash & Current Account 7.77 86 Cash & Current Account & Deposit Account 1.54 17Mixed 14.09 156Total 1107
  32. 32. Table 2: Trust in Financial Institutions Fully trust Rather Rather do No trust at AnsweredState banks 9.56 trust 31.59 not trust 27.05 all 31.8 1893Private banks 1.94 15.6 34.72 47.74 1904Insurance companies 1.47 11.73 31.81 54.99 1833Investment funds 0.83 8.01 32.78 58.39 1547Non-state pension funds 1.15 6.42 33.02 59.41 1572The State Pension Fund 14.44 45.47 19.77 20.32 1821Deposits Insurance Fund 2.65 15.76 35.03 46.56 1396Numbers in columns 2 to 4 are the percentages of respondents selecting a specific category. Answered out of 2007respondents
  33. 33. Table 3: Highest level of trust in public or private bankHighest level of trust in public or private bankFully trust 10.03Rather trust 33.15Rather do not trust 26.9Do not trust at all 29.92# answered, out of 2007 1,855Numbers in rows 2 to 5 are the percentages of respondents selecting a specific category.
  34. 34. Table 5: Banks and mattresses in terms of safety and profitability Safety ProfitabilityMattress>Banks 46.5 29.6Mattress=Banks 43.8 50.6Mattress<Banks 9.7 19.8# answered out of 2007 1,179 1,139Numbers in rows 2 to 4 are the percentages of respondents falling in a specific category.
  35. 35. Table 8: basic specification Mattress Mattress Plan Mattress Plan Mattress (1) (2) (3) (4) Rather trust 0.021 0.004 0.67 0.12 Rather do not trust 0.117*** 0.144*** 3.32 3.6 Do not trust at all 0.227*** 0.177*** 4.94 4.22 Profitability Mattress=Banks -0.124*** -0.122*** -2.72 -2.77 Profitability Mattress<Banks -0.118** -0.130** -2.13 -2.44 Safety Mattress=Banks -0.047 -0.062 -1.17 -1.57 Safety Mattress<Banks -0.129** -0.126** -2.37 -2.26 Pseudo R2 . 0.064 0.03 0.054 0.029 N 930 482 997 522Numbers in the table are average marginal effects after a logit regression. * means significant at 10 %, ** at 5 % and*** at 1 %.Omitted categories are trusting banks, and perceiving cash to be better than banks in terms ofprofitability and safety, respectively.
  36. 36. Adding Additional Variables• settlement type matters for current savings• richer people tend to be less likely to save in cash• less aware about financial markets, more likely to save in cash• education insignificant• self- employed being less likely and students more likely to choose for cash• age does not have a significant effect.• males are somewhat more likely to have current savings under their mattress
  37. 37. Table 10: Adding trust in the State Pension Fund Mattress Mattress Plan Mattress Plan Mattress 5 6 7 8 Rather trust 0.012 -0.013 0.32 -0.32 Rather do not trust 0.121*** 0.079* 2.72 1.67 Do not trust at all 0.176*** 0.132** 3.36 2.55 Profitability Mattress=Banks -0.146*** -0.146*** -3.25 -3.18 Profitability Mattress<Banks -0.072 -0.131** -1.25 -2.33 Safety Mattress=Banks -0.055 -0.076* -1.3 -1.74 Safety Mattress<Banks -0.120** -0.153** -2 -2.46 Rather trust Pension Fund 0.037 0.130** 0.023 0.065 1.03 2.42 0.61 1.13 Rather do not trust Pension Fund 0.123*** 0.311*** 0.186*** 0.306*** 2.67 4.7 3.52 4.14 Do not trust at all Pension Fund 0.100* 0.277*** 0.056 0.191*** R Adj sq. 0.172 0.238 0.116 0.168 N 772 415 824 438Numbers in the table are marginal effects after a logit regression. * means significant at 10 %, ** at 5 % and *** at1 %. The control variables from the extended specification are also included but reported in the appendix only.Omitted categories are trusting banks, and perceiving cash to be better than banks in terms of profitability andsafety, respectively, female, Kyiv region, higher education, more aware than others about financial markets,employee, village, economize on food, trusting the pension fund
  38. 38. Table 11: Adding trust in the Deposit Insurance Fund Mattress Mattress Plan Mattress Plan Mattress Rather trust -0.019 0.009 -0.44 0.21 Rather do not trust 0.114** 0.134*** 2.4 2.77 Do not trust at all 0.189*** 0.218*** 3.23 3.89 Profitability Mattress=Banks -0.190*** -0.154*** -3.91 -3.14 Profitability Mattress<Banks -0.084 -0.119* -1.34 -1.94 Safety Mattress=Banks 0.002 -0.03 0.04 -0.64 Safety Mattress<Banks -0.054 -0.098 -0.91 -1.57 Rather trust Deposit Insurance Fund -0.008 0.022 -0.074 -0.098 -0.13 0.26 -1.07 -1.12Rather do not trust Deposit Insurance Fund 0.091 0.140* 0.034 0.121 1.54 1.71 0.51 1.4Do not trust at all Deposit Insurance Fund 0.076 0.286*** -0.008 0.158* 1.21 3.46 -0.11 1.8Numbers in the table are marginal effects after a logit regression. * means significant at 10 %, ** at 5 % and *** at1 %. The control variables from the extended specification are also included but reported in the appendix only.Omitted categories are trusting banks, and perceiving cash to be better than banks in terms of profitability andsafety, respectively, female, Kyiv region, higher education, more aware than others about financial markets,employee, village, economize on food, trusting the pension fund
  39. 39. Conclusions• Ukraine: Low trust environment• Trust matters for savings – Trust in banks – General trust – Less so for deposit insurance• But other factors are important too

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