Trust matters: A global perspective on the influence of trust on bank market risk

Omneya Abdelsalam, Antonios Chantziaras, Nathan Lael Joseph and Nikolaos Tsileponis

Journal of International Financial Markets, Institutions and Money, 2024, vol. 92, issue C

Abstract: This paper examines the role of societal and organizational trust in mitigating market risk within the banking sector. Using a global sample of 10,616 bank-year observations across 45 countries, we find that higher trust significantly reduces bank total and idiosyncratic risk. The risk-mitigating effect of societal trust becomes more pronounced for banks headquartered in countries with weaker investor protection, diminished legal rights, dissatisfaction with government economic policies, and higher political unrest. Our results suggest that trust serves as an alternative governance mechanism, substituting for ineffective formal institutions in reducing bank risk. These findings have important implications for financial regulation worldwide.

Keywords: Equity risk; Idiosyncratic volatility; Societal trust; Organizational trust (search for similar items in EconPapers)
JEL-codes: G10 G14 G21 G28 (search for similar items in EconPapers)
Date: 2024
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfin:v:92:y:2024:i:c:s1042443124000258

DOI: 10.1016/j.intfin.2024.101959

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