How does the government know my bank?

How can confidence in banks be restored?


"You can bank on it" means in English that you can rely on something 100%. Brett King describes where trust in banks comes from, how it has been lost and how it can be regained.


I grew up in a world where a run on a bench wasn't exactly realistic. I grew up in a world where someone, when trying to substantiate an assertion, would say, "you can take that to the bank" or "you can bank on it!" 100% rely). I grew up in a world where the government guaranteed my deposits, cash, or nest egg, at least as long as I deposited it with a well-known bank or financial institution.

But that was once upon a time ...

Memories of times gone by

In the 1930s and 1940s, after the Great Depression, there was a perception in the United States that the break-up of small and regional banks in favor of the big banks' branches, which are usually based on efficiency, distribution and transactions, posed a risk to the stability of the banking system . If there were only a few large banks and there was a widespread loss of confidence, then the whole system could fail. This explains why there are so many financial institutions in the US (7,334 FDIC insured institutions as of March 2012) compared to other developed economies (5,404 banks across the EU [1]). The US regulatory authorities have always tried to institutionalize support for local communities and to make monopoly approaches more difficult. These so-called “foreign systems” of the branch banking business were branded as “monopoly, undemocratic and, to a large extent, fascist systems” and as “destroyers of individualism”. [2]

This lingering psychology of security, seen primarily in the physical location of banking (and its prevalence), comes from the memories of the "contagious" bank runs during the Great Depression:

“It is well known that a large bank with perhaps thousands of branches and a remote headquarters knows the market much worse than a local bank. People likely think she is big and powerful and therefore able to always meet her obligations. When depositors initiate a run on a local branch, there is a risk of spreading their psychology and infecting depositors in remote branches. ”[3]

There was a whole post-war generation who grew up with a healthy skepticism about big banks and the risk of a bank run. However, almost 70 years after the Great Depression, the population has finally begun to believe that banks are inherently established, secure and trustworthy. We all had a bad shock!

Trust evaporates in the global financial crisis

Since the global financial crisis, we have learned that banks work just like any other business: if they are poorly managed they can and will fail, and unfortunately there are many banks that have made bad business decisions over the past decade. Many invested in subprime mortgages, CDOs (collateralized debt obligations) and ABS (asset-backed securities), relied on excessively high leverage ratios, had poor risk-mitigation strategies or were simply too dependent on the capital markets. Some like Northern Rock had problems before the financial crisis and were overwhelmed when the economy turned over.

We also learned that despite the government backed licensing and regulation system, banks are not really part of a social support mechanism to help end users. Banks are simply businesses with an emphasis on generating profitability for their shareholders. At a time of worry about the role and health of the banking system, we have learned that there is no moral imperative about how banks should conduct business in relation to their role as supporters of consumers through funding and lending. They gladly took taxpayers' money to increase their liquidity which should enable them to lend to the end user. But none of that happened; the funds instead went into financial investments to increase profits and increase bonuses for executives.

As consumers, do we trust the banks? We could trust that the deposits the banks hold are secure, but we have seen through the veil and know that banks are not infallible. They, too, are just profit-obsessed companies, as all other good companies should be. We know they are poorly managed and can fail and while we were ready to support them through a rescue fund when the financial crisis erupted, we wonder today whether this was indeed the right strategy.

Regulation and advertising will not restore trust

The notion that the banking industry can rebuild trust through a combination of corporate news, advertising, or increased regulation is a wrong move.

Today's consumers have a healthy skepticism and distrust of major banking transactions. As consumers, we have options, e.g. through social media, to express our skepticism and to intensify it en masse. Mass psychology is involved in this, but one that society perceives as protection and as a way of creating transparency. Banks might be frustrated by this, but the reality is that “trust” in the industry has been largely developed over the past few decades through a combination of advertising and visible regulation, and that trust has been lost in a flash with the missteps of the crisis. Making similar attempts now to restore trust would very likely backfire.


"Trust" is a popular topic on many bank ads

Even regulators who believe they can protect markets and consumers are increasingly creating friction between customers and institutions through increased regulation. This often results in frustration and cynicism and prevents the building of trust.

The only way to "trust" banks again as we used to do is to change the way banking works. The greater the transparency and the better a bank serves its customers, the more we will trust that banks work for us and not for themselves. Transparency, benefit and great service are all that count today. The old pillars of trust: security, brand messages, taxes or regulation are no longer effective.


[1] European Banking Federation 20 &% 20Figures% 202011.pdf

[2] American Banker Journal, March 23, 1939, p.2

[3] Branch Banking: Its historical and theoretical position in America and abroad, Arno Press 1980 (Chapman and Vesterfield), p. 275

Originally published under the title "What will it take to restore trust in the banking system?"