Trust in Banks Falls Back to Financial Crisis Lows

Americans' overall trust in the nation's financial system has dropped to 20%, a level that matches the lows recorded during the heart of the financial crisis in late 2008, according to the latest results from the Chicago Booth/Kellogg School Financial Trust Index. That represents a drop from the 26% trust level measured at the end of 2010.

Index co-founder and economist Luigi Zingales at the University of Chicago says he was surprised to see the sudden and dramatic dip, and suggests it may represent the psychological shock that followed the March earthquake and tsunami in Japan, which occurred just before the survey was taken. In 2010, trust had been slowly trending upward, according to the index, which Zingales created with Paola Sapienza, a finance professor at Northwestern University's Kellogg School of Management. Even so, the figures are still well below the overall level of trust from before the financial crisis, he notes.

"It shows how fragile and temperamental the country's financial system is right now," Zingales says. "It offers insight into how global catastrophes can affect Americans' trust in financial institutions."

Trust in financial institutions is a key ingredient for market development, the economist explains. "It is an expectation about how much you can trust and engage in a situation without being taken advantage of," he says. More than half of Americans believe the stock market will drop by a third in the next year, the survey also showed.

Another index trend shows that, despite an overall decline in trust for financial institutions -- especially ones in which the government has a stake -- there is more trust in smaller financial institutions such as credit unions and local banks. For investors, the reduction in trust will translate into fewer investments in complex securities or equities, and more investments in cash or cash-like instruments, Zingales says.

Catherine New is a reporter with the Huffington Post Media Group.