Trust in Banks and Borrower Behavior

We investigate whether trust plays a significant role in retail borrowers’ decisions to transact with banks. We use bank enforcement actions publicized in the local news media as a reputational shock that undermines consumers’ trust in banks. Survey data indicate that enforcement actions are associated with significant declines in trust in banks and bankers. Using granular loan data from TransUnion that links retail borrowers to banks, we find that higher-quality borrowers exit sanctioned banks. These effects are not present prior to the enforcement action. Consistent with declining trust in the banking system, higher-quality borrowers leave not only sanctioned banks but also unsanctioned banks with exposure to sanctioned banks, migrating instead to nonbank financial institutions. Sanctioned banks have fewer repeat borrowers, and the shift towards lower-quality borrowers is more pronounced with declining survey-based trust measures and negative local news coverage. In contrast, borrower quality shows little change when local news is positive or conveys trust and in regions without local news outlets, underscoring the crucial role of the news media in contextualizing news and shaping consumers’ trust in banks. Additional tests reveal these findings are inconsistent with supply-side changes.