Trust in Banks and Borrower Behavior: Evidence from Supervisory Actions and Local Information Quality

We find that trust plays a significant role in retail borrowers’ decisions to transact with banks, and the local news media shapes this trust. Using bank enforcement actions as a shock to bank reputation that undermines consumers’ trust, and granular loan data, we find that originated loans and new borrowers are of lower quality while an enforcement action is open. The effects are more pronounced with declining survey-based trust measures and negative local news coverage and nonexistent when local news is positive or conveys trust and in regions with no local news outlets. Our findings are inconsistent with supply-side effects.