Trust in Banks and Borrower Behavior: Evidence from Supervisory Actions and Local Information Quality
Prof. Rimmy E. Tomy
Associate Professor of Accounting
and Kathryn and Grant Swick Faculty Scholar
The University of Chicago Booth School of Business
We study how consumers’ trust in banks influences their borrowing decisions. We use bank enforcement actions as a shock to bank reputation, undermining consumers’ trust in banks. Utilizing granular loan data from a credit reporting agency that links borrowers to banks, we find a decline in borrower and loan quality for loans issued by banks facing reputational shocks. Notably, this decline is absent in news deserts, counties experiencing newspaper closures, and those with fewer newspaper establishments, reinforcing a trust mechanism as poor local information environments mitigate the reputational damage from enforcement. Our findings are not attributable to supply-side factors such as increased loan volume or loosened credit terms. Additionally, survey data indicate that enforcement actions are associated with declining local trust in banks and bankers. Overall, our results suggest that trust in banks influences borrower behavior.
