News & Events

Professor Paola Sapienza

Professor Paola Sapienza

Chicago Booth/Kellogg School Financial Trust Index

Trust in the U.S. financial system sinks to 20 percent; trust in banks and mutual funds falls substantially

5/12/2011 - Trust in America’s financial system has tumbled from 26 percent to 20 percent, according to the Chicago Booth/Kellogg School Financial Trust Index. The latest report shows that Americans’ overall trust has fallen to levels recorded during the earliest months of the financial meltdown (20 percent in December 2008 and 19 percent in March 2009).

A possible explanation for this fall in trust is that the survey was conducted shortly after the Fukushima Daiichi nuclear plant disaster in Japan. Also, the survey authors believe that Japan’s recent earthquake and drastic stock-market drop might have affected Americans’ level of financial trust.

The Chicago Booth/Kellogg School Financial Trust Index is a quarterly look at Americans’ trust in the nation’s financial system, measuring public opinion every three months to track changes in attitude. Co-authors Paola Sapienza, professor of finance at the Kellogg School, and Luigi Zingales, professor of entrepreneurship and finance at the University of Chicago Booth School of Business, published the May 12 report as the tenth quarterly update. The latest issue reflects attitudes in March 2011.

The report finds a decline in trust across most of the components measured in the Index. Most notably, Sapienza and Zingales report a significant drop in trust in banks (from 43 percent to 32 percent) and mutual funds (from 31 percent to 25 percent). Trust in the stock market slid from 16 percent to 12 percent.

“The latest findings show how fragile and temperamental the country’s financial system is right now, even as we slowly climb out of the recession,” said Zingales. “This drop in trust offers some insight into how global catastrophes can affect Americans’ trust in the financial institutions where they invest their money.”

Growing fear of another large stock market drop
Not surprising given overall trends, the latest data finds that Americans are also concerned that the stock market will drop by more than one-third over the next 12 months. The perceived risk of a large drop in the stock market has increased about 10 percentage points since December 2010, with 50 percent of respondents believing such a drop is more likely now.

Homeowners struggling to pay their mortgages
This wave of the Index also explored Americans’ attitudes toward homeownership. The researchers cited a decrease in strategic defaults among all states from 37 percent in December 2010 to 30 percent in March 2011.

“This change might be due to the increase in the perceived probability that a lender will go after a strategic defaulter,” said Sapienza.

Respondents said they believe homeowners are choosing not to pay their mortgages because they are unemployed or underemployed (46 percent) or because they over-borrowed (35 percent) due to the state of the economy.

The economists also asked participants about their feelings regarding recent news that some banks tried to issue foreclosures using false or faulty documentation. They found that 97 percent of respondents believe banks should pay a fine for this attempt. More than half of the respondents preferred that fines paid by banks be given to struggling homeowners.

“People are sympathetic to the plight of the American homeowner — (they understand) why homeowners are struggling to pay their mortgages and why they would choose to walk away from their loan. Our report indicates that Americans believe accountability lies with lenders and financial institutions,” said Sapienza. “For example, for homeowners who were victims of deceptive lending practices, respondents were more likely to say that bank fines should help those individuals.”

On the other hand, survey participants said they were less in favor of using bank fines to help homeowners who overborrowed.

Americans’ anger mounts
The percentage of Americans who are angry about the country’s current economic situation increased from 52 percent to 57 percent. The current figure is near the level reported during the beginning of the financial meltdown (60 percent in December 2008).

The polarization of the housing market
The latest report shows that perceptions of the real estate market have worsened. There was a spike in the percentage of people who think home prices will increase in their area (from 24 percent to 30 percent). At the same time, the percentage of people who think home prices in their area will remain stable declined 9 percent, from 54 to 45 percent.

“Real estate has not seen a big turnaround yet,” said Zingales. “The sluggish housing market is a possible factor in creating this polarization.”

ABOUT THE SURVEY: On a quarterly basis, the Financial Trust Index captures the amount of trust that Americans have in the institutions in which they can invest their money. The survey is conducted by Social Science Research Solutions (SSRS) using ICR/International Communications Research’s weekly telephone poll service. As part of the most recent wave, a total of 1,007 individuals were surveyed from March 16 to March 24, 2011. The institutions considered in the survey are banks, the stock market, mutual funds and large corporations.