Trust among US finance professionals has declined far more sharply than in the general population, finds study that has implications for coronavirus bailout plans.
The level of trust among US finance professionals has declined far more sharply than among the general population over the past four decades, finds a new academic study that has implications for the effectiveness of huge COVID-19 (coronavirus) bailout programmes enacted by governments around the world.
The study by academics in Germany and the UK focuses on “generalised” trust (trust in anonymous other people), and finds that the much greater decline in such trust among finance professionals is particularly strong in the investment sector and among professionals with higher seniority and influence. It is tied to a lack of trust only in institutions related to the finance industry.
“Simply put, while generalised trust has declined in US society as a whole, it has declined significantly more across finance professionals. This relative decline in trust is unique to finance,” says the study, entitled “The Death of Trust across the Finance Industry”.
While the research predates the COVID-19 crisis, implications of the findings could complicate government efforts to implement credit programmes and other measures to combat the pandemic, says study co-author Raghavendra Rau, Sir Evelyn de Rothschild Professor of Finance at University of Cambridge Judge Business School.
“Any actions taken by central banks or governments need to be trusted by the financial system in order for them to react appropriately by extending credit to the rest of the economy,” says Professor Rau. “Yet the paper finds that it’s finance professionals who have particularly lost trust – significantly more than people working in major companies unrelated to finance, the executive branch of the federal government, and Congress.
“Such lack of trust is likely to have direct consequences for the real economy: if banks do not trust their customers, they are unlikely to react to government actions by relaxing credit constraints, or relax them towards the ‘wrong’ customers. This was evident during the financial crisis, when despite declining interest costs the credit standards for subprime credit went down.
“Already, there has been a public perception that banks have favoured their largest customers in implementing the Paycheck Protection Program in the US, which was designed to help struggling small businesses keep employees on the payroll.
“Companies are now racing for cash because they think it unlikely that they will get financial help from intermediaries when they need it the most.”
Economic bailout programmes enacted by governments to combat the coronavirus pandemic include a £330 billion loan package in Britain and a $2.2 trillion relief package in the US that includes a $500 billion lending programme for companies, cities and states, and $367 billion for small businesses.
The study is based on data from the General Social Survey in the US over a 39-year period of 1978 to 2016, using survey responses from about 1,500 respondents each year to 1993 and 2,800 respondents every second year from 1994 to 2016.
The study finds that aside from finance professionals, no other professional groups show the same drop in trust relative to the general population. The authors attribute this steeper lack of trust among finance professionals to three changes over recent decades: economic conditions that have differential effects on finance professionals, workplace composition among finance professionals, and fewer opportunities for human interaction among finance professionals.
The study points out that trust, and the use of similar implicit contracts in finance, often act as a substitute for explicit regulation. Given that most governments are providing coronavirus assistance with few mandatory requirements for recipients, this lack of trust among finance professionals could result in less of the bailout money going to intended recipients, says Professor Rau.
This also causes worries about the potential misbehavior of finance professionals who will get massive amounts of money and have a responsibility to invest it in the right projects, particularly helping to relieve credit constraints. In simple terms, they have to provide a public good-like service and the basis for providing such a service is societal generalised trust.
The authors also point out that the level of generalised trust in finance is particularly important owing to the complexity of financial products, which creates an information asymmetry between finance professionals and clients that is higher than in most industries where the products are easier to understand.
The study, entitled “The Death of Trust across the Finance Industry”, is co-authored by Peter Limbach of the University of Cologne and its Centre for Financial Research, Raghavendra Rau of University of Cambridge Judge Business School, and Henrik Schurmann of BUW – Schumpeter School of Business and Economics at the University of Wuppertal in Germany.