Trust in Lending
59 Pages Posted: 15 Jul 2018 Last revised: 15 Mar 2019
Date Written: June 23, 2018
We develop a theory of trust in lending, distinguishing between trust and reputation, and use it to analyze the competitive interactions between banks and non-bank lenders (fintech firms). Trust enables lenders to have assured access to financing, whereas a loss of investor trust makes this access conditional on market conditions and lender reputation. Banks endogenously have stronger incentives to maintain trust. When borrower defaults erode trust in lenders, banks are able to survive the erosion of trust when fintech lenders do not. Trust is also asymmetric in nature — it is more difficult to gain it than to lose it.
Keywords: Trust, Banks, Non-banks, Fintech, Lending, Financial Intermediation, Credit Market, Financial Crisis
JEL Classification: E44, E51, E52, G21, G23, G28, H12, H81
Suggested Citation: Suggested Citation