Abstract
We examine the effect of historical banking crises on contemporary trust in banks. Using the 1870-2019 Banking Crisis database, we show that banking crises in the distant past continue to depress trust in banks. Trust can take long to recover from emotionally salient crises that become part of the collective memory, as banking crises often have. Over the long run, trust building and repair have not fully restored trust lost due to past crises. One cause may be vicious cycles in which distrust has an enduring negative impact on trust maintenance and repair capacity. In a low-trust environment, banks may reduce investment in building relational trust, instead relying on technology, monitoring, contracts, and institutional trust. Regulation and routine allow banking to continue in low-trust environments but do not recover lost relationship-based trust. The repeated nature of banking crises may cause trust repair tools to lose effectiveness over time. Even sincere attempts to repent and reform may appear as cheap talk in economies that suffer cumulative episodes of banking crises. Lastly, compared to other sectors, banking suffers from inherent problems in crisis management. The short-term pragmatic solution to limit the crisis is often bailing out culpable banks and bankers. However, the lack of sanctions for transgressors can harm longer-term trust repair. Trust in banks has a moral component, where trust falls not only due to the crisis itself but also the perception of injustice.