This paper aims to examine the relationship between societal trust and bank asset opacity using an international sample of banks.
The authors use an international data set of banks and panel regressions. For robustness purposes, the authors use multiple measures of both societal trust and bank opacity as well as two-stage least squares regressions to address endogeneity concerns.
The authors find that societal trust is negatively associated with the opacity of bank portfolios.
Results of this study inform regulators on the importance of trust for the banking sector and support policies towards enhancing trust in banks. Also, a sustained environment of high levels of trust in banks can prevent the introduction of extensive prudential regulations that policymakers often use to establish trust, as well as lower the additional resources required when trust levels are low.
To the best of the authors’ knowledge, this is the first study that examines this relationship. The literature provides only limited evidence and not for the banking sector, for which opacity is of outmost importance.
