Trust in Banks and Implications for Savings Behaviour

Tom Coupé

Kyiv School of Economics

www.kse.org.ua

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

“NBU: Ukrainians trust banks”

“Trust of the Ukrainians in the banking system has increased annually …. head of the NBU department … told a round table, ForUm correspondent reports.” 

"The phrase that people do not trust in banks is one of the hogwashes. The figures prove us that population trusts in the banking system, because citizens get salaries through banks, send funds, open deposits and take credits".

• http://en.for-ua.com/news/2012/12/13/161033.html

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?

Confidence in Financial Institutions (Gallup,2009)

Lesson I

• Lots of variation over countries• Ukraine scores really bad

• Source: https://worldview.gallup.com/default.aspx

Trust in Banks and Financial Institutions (LITS, 2006)

Trust in Banks and Financial Institutions (LITS, 2010)

Hunga

ry

Roman

ia

Ukrain

e

Serb

ia

Croati

a

Bosni

a-Herz

egov

ina

Bulga

ria

Russia

Slov

enia

Mol

dova

Latvia

Lithua

nia

Mac

edon

ia

Turke

y

Kazak

hstan

Polan

d

Slov

akia

Czech

Mon

teneg

ro

Armen

ia

Kosov

o

Alban

ia

Belaru

s

Kyrgy

zstan

Azerb

aijan

Georg

ia

Tajiki

stan

Mon

golia

Uzbek

istan

Estoni

a

German

yIta

ly

Fran

ce

Great B

ritain

Swed

en0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

no trust

trust

Razumkov Center Poll

• Ukraine, poll_ Do you trust commercial banks_ (recurrent, 2009-2011) __ Razumkov Centre.pdf

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

34

55

28

15 1

7

11

8

9

5

9 9

4 5

57

27

15 16

8

9

11

6 5 6

3 3

56

28

14

14

13

13

10

8

7 6

5

4

54

22

25

11

17

14

20

11

8 9

20

0

10

20

30

40

50

60

Church Army Localauthorities

Militia Banks Foreignowned

companies

Ukrainianowned

companies

Insurancecompanies

President ofUkraine

Government Politicalparties

VerhovnaRada

September 2007 November 2008 March 2009 September 2009

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 reviving

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?

Literature

• Mosh and Prast (2008) – Netherlands

• Knell and Sixt (2009)– Austria

• Mudd and Nalev(2009) – Hungary

• Stevenson and Wolfers (2011)

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

Confidence In National Government (Gallup 2009)

020

40

60

80

10

0R

ep.

0 20 40 60 80 100confidence in government

What Explains The Variation in Trust in Banks over Countries?• Institutional framework

What Explains The Variation in Trust in Banks over Countries?• Institutional framework• Historical trauma

Trust and Economic Growth

020

40

60

80

10

0ove

rall

% y

es

-10 0 10 20growthbefore

What Explains The Variation in Trust in Banks over Countries?• Institutional framework• Historical trauma• Economic Situation

Regulation0

2040

6080

100

ove

rall

% y

es

5 10 15restrictions

What Explains The Variation in Trust in Banks over Countries?• Institutional framework• Historical trauma• Economic Situation• Regulation?

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?

53

44

17

24

18

19

23

12

12

15

15

11

11

10

5

3

63

43

4

5

62

49

25

23

22

18

16

15

13

11

11

8

8

7

5

3

1

1

11

0.5

1

1

1

0.1

1

2

0.4

20

23

18

15

15

10

12

12

11

9

10

24

1

0.4

0.2

Reliable, stable bank

Good tariffs and interest rates

Long time on the market

Convenient location of the bank office

Positive experience in using the bank services

Recommendations of my friends or relatives

Wide network of branches and ATMs

The bank is the market leader

One can get the bank services easy and fast

Polite and qualified staff

Bank offers the product which meets my needs at maximum

Ukrainian bank

Being personally acquainted with someone from the bank staff

Simple and clear products of the bank

Foreign bank

Recommendations of my employer

Attractive and tidy bank branch offices

Access to personal account and performing operations via the Internet

Bank services and advertising

Attractive logo / image of the bank

Hard to say

September 2008

March 2009

September 2009

Why does it Matter?GFK - Overall importance: dynamics

% of all respondents, September 2008 (N=1000); March 2009 (N=1000); September 2009 (N=1000).

Reasons for starting relations with banks (GFK)

26

14

19

19

11

12

3

24

21

21

14

13

12

6

Trust in this bank

It is decision ofmy employer

Convenientlocation of bank

branch

Other attractivebanking services

(not rates)

High quality ofservices

Attractive rates

Other

2011'Q12011'Q2

% of those, who started relationship with banks, N (2011'Q1) = 452*, N (2011'Q2) = 566

*Alternative was added to questionaire in February 2011.

Trust and Deposit flows

Global Findex Survey – Ukraine (WB, 2011) No Account, because:

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

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

Table 1: Methods of saving, current and planned.

Method of Saving Now Planned Saving in cash in the Hryvnia 41.06 40.96 Saving in cash in foreign currency 12.01 17.99 Bank deposits (time deposits) and saving accounts 6.73 8.37 Payment cards and current accounts 12.41 8.57 Banking (precious) metals or deposits in precious metals 0.10 0.60 Payments to Credit union 0.25 0.25 Participation in non-state pension funds 0.20 0.75 Participation in investment funds 0.15 0.25 Investment in shares and bonds of enterprises 0.10 0.35 Investment in state securities 0.05 0.20 insurance policy 0.80 1.15 Purchase of real estate as investment 2.19 5.38 Lending money to other people at interest 0.65 0.70 Precious metals 1.35 2.09 Plots of land 2.59 4.73 Numbers in the table are the percentages of respondents selecting a specific method.

Banks versus Mattresses

Share Number of ObservationsCash Only 67.84 751

Deposits Only 4.88 54Current Account Only 12.20 135

Current and Deposit Account 0.99 11Banks Only 18.07 200

Cash & Deposits 4.79 53Cash & Current Account 7.77 86

Cash & Current Account & Deposit Account 1.54 17Mixed 14.09 156Total 1107

Table 2: Trust in Financial Institutions

Fully trust Rather

trust Rather do not trust

No trust at all

Answered State banks 9.56 31.59 27.05 31.8 1893 Private banks 1.94 15.6 34.72 47.74 1904 Insurance companies 1.47 11.73 31.81 54.99 1833 Investment funds 0.83 8.01 32.78 58.39 1547 Non-state pension funds 1.15 6.42 33.02 59.41 1572 The State Pension Fund 14.44 45.47 19.77 20.32 1821 Deposits Insurance Fund 2.65 15.76 35.03 46.56 1396 Numbers in columns 2 to 4 are the percentages of respondents selecting a specific category. Answered out of 2007 respondents

Table 3: Highest level of trust in public or private bank

Highest level of trust in public or private bank Fully trust 10.03 Rather trust 33.15 Rather do not trust 26.9 Do not trust at all 29.92 # answered, out of 2007 1,855 Numbers in rows 2 to 5 are the percentages of respondents selecting a specific category.

Table 5: Banks and mattresses in terms of safety and profitability

Safety Profitability

Mattress>Banks 46.5 29.6 Mattress=Banks 43.8 50.6 Mattress<Banks 9.7 19.8 # answered out of 2007 1,179 1,139 Numbers in rows 2 to 4 are the percentages of respondents falling in a specific category.

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 930 482 997 522

Numbers 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 of

profitability and safety, respectively.

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

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 772 415 824 438

Numbers in the table are marginal effects after a logit regression. * means significant at 10 %, ** at 5 % and *** at 1 %. 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 and safety, respectively, female, Kyiv region, higher education, more aware than others about financial markets, employee, village, economize on food, trusting the pension fund

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 -1.12 Rather do not trust Deposit Insurance Fund 0.091 0.140* 0.034 0.121

1.54 1.71 0.51 1.4 Do not trust at all Deposit Insurance Fund 0.076 0.286*** -0.008 0.158*

1.21 3.46 -0.11 1.8 Numbers in the table are marginal effects after a logit regression. * means significant at 10 %, ** at 5 % and *** at 1 %. 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 and safety, respectively, female, Kyiv region, higher education, more aware than others about financial markets, employee, village, economize on food, trusting the pension fund

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