Question

Why is public trust in banks essential? What would be the ultimate consequence if the public loses trust in banks? Discuss

Answer 1

Public trust in banks is essential because it is on the basis of trust of the public that banks are able to attract depositors and are able to find households and entities that need funds and hence are willing to borrow money from banks to finance their requirements of housing and business. Thus public trust in banks improves financial inclusion and improves financial stability. Both of these factors together contribute to economic growth.

When public loses trust in banks that it will immediately lead to bank runs and all depositors will withdraw money from their accounts held in banks. Ultimately loss of public trust in banks will lead to an economic disaster as financial inclusions will fall to minimum levels and funds will not be mobilized for the purpose of fueling the economy. Financial sector will fall and this will have a domino impact on the overall economy as different sectors will start falling apart in the absence of proper banking system. In the absence of resource mobilization factories and companies will find it difficult to sustain their activities and ultimately and eventually different aspects of the economy will fall apart.