Trust in Banks and Implications for Savings Behaviour

Tom Coupé

Kyiv Economics Institute at the Kyiv School of Economics

www.kse.org.ua

Outline

• Trust in Banks

– An international comparison of the trust in banks

– Some details on trust in banks in Ukraine

– Why is trust in banks important and what are the consequences of a lack of trust?

– 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, Belarus scores average

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

Trust in Banks and Financial Institutions (LITS, 2006)

Trust in Banks and Financial Institutions (LITS, 2010)

Macro Lessons

• Lots of variation over countries• Ukraine scores really bad, Belarus scores average• Stability in Belarus, changes 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

Trust Towards Different Institutions – Ukraine versus Belarus Ukraine

Trust No Trust

•Banks: 22.3 56.2

•Government: 23.5 57.0

•Religion: 40.3 31.2

Belarus

Trust No Trust

•Banks: 50.2 23.9

•Government: 49.9 25.3

•Religion: 47.9 22.3

Macro Lessons

• Lots of variation over countries• Ukraine scores really bad, Belarus scores average• Stability in Belarus, changes in Ukraine• In Ukraine, little trust in any institution – Belarus

moderate trust in most institutions

• Why determines trust?

Existing studies

• Mosh and Prast (2008)

– Netherlands

• Knell and Sixt (2009)

– Austria

• Mudd and Nalev(2009)

– Hungary

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 is important support economic growth

• Trust in banks can be supported through

– Improved institutional environment

– Avoiding ‘trauma’ (credible deposit insurance)

– Economic success

– Regulation?

• Why does it matter?

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).

Trust and Deposit flows

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.

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

• richer people tend to be less likely to save in cash

• less aware about financial markets, more likely to save in

• 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

Why Do Banks Need Deposits - Banks’ Roles in the Economy• Banks transform the maturity of assets, transforming

relatively short-run deposits into long term financial assets

• Banks act as delegated monitors and ensure that firms use the resources allocated to them effectively.

• Banks can help overcome asymmetric information problems by forming long-lived relationships with firms.

• They also play an important role in sharing risk in the economy by diversifying and smoothing fluctuations over time.

Macro Lessons

• Situation– Lots of variation over countries– Ukraine scores really bad, Belarus scores average– Stability in Belarus, changes in Ukraine– In Ukraine, little trust in any institution – Belarus

moderate trust in most institutions • Implications

– Keeps people from using bank services– Keeps deposits out of the banking systemeconomic growth