Trust in banks: Fostering (Naïve) firm-bank relationships

We refine the definition of trust in banking by isolating the role of institution-based trust, defined as trust in banks in general, and look at the effects of variations of institution-based trust on the development of recurring firm-bank relationships. Using U.S. syndicated loan transaction data from 1998 to 2016, we show that borrowers and lenders deploy more intense interpersonal relationships in enhanced trust environments. However, when generally trusted, banks tend to exploit these relationships by reducing their lending commitments and raising loan spreads. This outcome can be attributed to the emergence of a naïve form of interpersonal trust on the part of the borrower.