In God We Trust; Everyone Else Has Much Work To Do

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The concept of trust has always been a premium in the financial markets, and the way financial institutions have sought to instill trust has evolved over the years. Now, the question for many is how to regain trust in the wake of the recent corporate scandals.

"It's always been interesting to me how financial institutions have sought to instill trust historically," said Bob Hoel of the Filene Research Institute. "They started out with a prominent business person as the leader and spokesperson, and he was someone people felt they could trust. When the institution outgrew that personality, they turned to gigantic buildings of marble with pillars that were very impressive. The next step was (deposit) insurance."

But credit unions took a much different route from their banking counterparts. "With credit unions, you trusted it because it was your friends and neighbors who started it and ran it, and you could trust them to do what was right for you because you were all in the same boat," Hoel explained. "Plus there was the supervisory committee, which was the watchdog over the board."

Even so, credit unions eventually turned to deposit insurance as another tool to build trust, moving from the old state stabilization funds to state, federal and private insurance.

"What financial institutions of every stripe have tried to do is institutionalize that trust and credibility," he suggested.

Ellen Whitner, senior associate dean of the McIntire School of Business at the University of Virginia and co-author of a study on forging trust published by the Filene Research Institute, agreed.

"One of the benefits to a bank or a credit union, as opposed to the stock market, for example, is (deposit) insurance. At least you know you're not going to lose your principal. And that's something worth playing up right now," Whitener observed. "The thing about insurance is that then, you don't have to trust the people, who may be people you don't know, instead you can transfer that trust to the system. Behind the insurance system is the federal government, and most people probably trust that the United States of America is not going to go bankrupt."

Indeed, the incidence of financial institutions for any reason is relatively low, Hoel noted, in particular failures due to wrong-doing are even lower. "There are very few institutions failing because of embezzlement. There are a lot of bond claims due to embezzlement, many that we never even hear about. But I'm not aware of any member who has been harmed by a credit union failure, that hasn't been made whole, except, of course, in Rhode Island with the RISDIC failure years ago."

With deposit insurance becoming a potentially important marketing feature for credit unions, it's not surprising that a number of credit unions are looking at excess share insurance.

"It's interesting to see how many credit unions are insuring more than the $100,000 (covered by federal deposit insurance)," Hoel noted. "Really, it's astonishing how very safe credit unions are and how many trust credit unions enough."

There is, however, a flipside to that trust. "Some economists argue that bank insurance is harmful in the long run because then consumers don't feel they have to be as vigilant," Hoel explained. "Consumers can be a very powerful watchdog, and some would suggest that insurance takes the onus off consumers to continue to be that watchdog. Perhaps they would say we trust too much."

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