By: Daryl Tolliver
Most experts say that for any relationship to work out, there has to be a great deal of trust. If that's true, it doesn't look too good for many of the country's largest banks. Wall Street has been rocked by international scandals, a string of lawsuits related to deceptive practices and billion-dollar trading losses. And the results of a new study show that Americans are fed up with it.
The Chicago Booth/Kellogg School Financial Trust Index reveals that only 21 percent of Americans trust the financial system, which marks the lowest point since March 2009, when the recession was officially coming to a close. The study's analysts say the drop is largely the result of Americans' lack of trust in national banks.
"Trust in banks has collapsed," said Paola Sapienza, co-author of the Financial Trust Index and the Merrill Lynch Capital Markets Research professor of finance at the Kellogg School of Management at Northwestern University. "Since last quarter's issue of the Financial Trust Index, trust in banks has fallen five percentage points to a low of 27 percent. It's worth noting that this data was collected in late June, so this drop could be reflective of consumer attitudes toward the news about JP Morgan's multi-billion hedging losses announced in late spring."
If the JP Morgan trading loss is one of the reasons for diminishing trust among large banks, next quarter's figures are likely to plummet further amid recent court settlements related to deceptive practices by both Capital One and JP Morgan's credit card lending sectors.
The index showed the news wasn't all bad however, as more consumers continued to recognize the merits of smaller Main Street institutions, such as community banks and credit unions. Trust in community banks increased to 55 percent in June from 51 percent in March. The index showed Americans' trust in credit unions rose to 63 percent from 58 percent during the same period.
"This suggests that the national banks may be 'too big to trust,' whereas there is still a relatively high level of trust in banks at the community level," said Luigi Zingales, co-author of the Financial Trust Index and the Robert R. McCormack Professor of Entrepreneurship and Finance at the University of Chicago Booth School of Business.
During an era of rising fees and limited lending, community banks and credit unions have largely been able to attract more consumers by consistently offering sound and affordable products, lucrative reward programs and competitive fee structures.