Banking on Trust: Supervisory Transparency and Depositors’ Actions

We explore the role of institutional trust in influencing depositors’ reactions to bank super-visory actions in India. Utilizing a unique event that led to unexpected penalties on banks and the quasi-random nature of branch locations, we find news of penalties on some banks leading to deposit withdrawals from offending and neighboring nonoffending branches. Such withdrawals are more pronounced in regions with lower trust in public institutions, including trust in courts and banks. Trust is associated with information access and the quality of local services. We find limited evidence that credit and economic activity also decline in regions with deposit withdrawals.