Study confirms bank bashing during the financial crisis and shows ways banks can avoid this

Certain banks were particularly criticized in newspaper articles while more familiar banks were able to avoid bank bashing

11 September 2018

The day of September 15, 2018 will mark the tenth anniversary of the collapse of Lehman Brothers, the event that accelerated the financial crisis that shook the foundations of the world economic order. It was only through the provision of enormous rescue packages, mostly financed by taxes, that a number of banking institutions were saved from failure and the imminent collapse of the banking system was prevented. The significant losses reported by the banks, the sense of shock generated by the major impact on the real economy, and the subsequent rescue packages resulted in fierce criticism of the banks, the so-called bank bashing phenomenon. The economic contexts of this crisis were not easy to understand and this is still the case. Nevertheless – or perhaps precisely for this reason – the public view of the reputation of individual banks hardened during the crisis.

A team of academics from the universities of Mainz and Mannheim have undertaken an analysis of the factors that had an effect on the prestige of banks during the financial crisis. Their paper was recently accepted for publication by the international journal Business & Society. The team used automated text analysis to assess the character of newspaper articles on around 80 banks in Germany between 2005 and 2012. "Our aim was to understand how public opinion with regard to the reputation of individual banks evolved. We primarily wanted to find out why some banks were subject to particularly strong censure while other banks got off comparatively lightly," explained Dr. Mario Englert, who initiated the analysis process while working on his doctorate at the University of Mannheim.

Increase in reporting on banks during the financial crisis, predominantly negative

Newspaper articles, a generally recognized mirror of public opinion, were used to determine the light in which banks were viewed. For the eight-year period in question, the investigation drew on more than 90,000 articles from 20 German national newspapers with a total regular readership of more than 6 million people. It focused on all major banks operating in Germany, including foreign financial institutions.

The initial analysis of the newspaper articles showed a rise in the quantity of reporting on banks during the financial crisis. Furthermore, increased numbers of reports appeared on banks experiencing financial difficulties. Yet the analysis also showed that reporting during the financial crisis was primarily focused on banks that were particularly well-known to the newspaper readers due to, for instance, an extensive network of branch offices in Germany. Among other things, this finding can be explained by the fact that reports on prominent banks can offer readers a sense of orientation in turbulent times.

The study also investigated how the tone of reporting changed during the financial crisis. A specially developed dictionary was used to perform automated analysis of the newspaper articles. The analysis showed that public opinion towards the banking industry apparently became increasingly condemnatory during the financial crisis. It is by no means unusual for businesses facing financial and commercial difficulties to become the subject of negative reporting. Yet the reporting was even more negative than was to be expected given the actual financial situation of the banking sector. Hence the study was able to demonstrate that there was a generalized tendency to adopt a bank bashing attitude during the financial crisis.

More familiar banks able to evade bank bashing

The focus of the investigation was on identifying which banks were prone to particularly heavy criticism – and why certain banks managed to avoid being subject to bank bashing. The study confirmed the expectation that major banks and those with poor financial results had to submit to a particularly high level of reputational damage. Interestingly, this effect was more marked during the financial crisis than before. This means that newspaper articles addressing the financial losses of a bank during the financial crisis were significantly more negative than those dealing with similar events prior to the 2008 financial crisis.

However, the most important finding of the study was that certain financial institutions managed to avoid being subject to bank bashing. These were banks that would be particularly well-known to the readership because, for example, they have a large network of branches. Surprisingly, reporting on these banks during the financial crisis was even more positive than previously when factors such as the size and financial situation of the banks in question are taken into consideration. In relative terms, these banks were thus able to actually improve their reputation. In contrast, foreign and thus comparatively unknown banks were punished much more severely. "It is astonishing to see to what extent the non-financial determinant of 'familiarity' influenced public reporting on banks during the financial crisis. These relative reputational gains cannot be explained simply by the real commercial development of these banks," added Christopher Koch, Professor of Corporate Governance and Auditing at Johannes Gutenberg University Mainz (JGU).

Another effect that became apparent during the analysis is that the number of articles written and the judgment expressed in articles were significantly determined by a newspaper's geographical proximity to individual banks. For example, Frankfurt newspapers systematically rated banking institutions with their head office in Frankfurt more positively than did other newspapers.

The right strategy for the future

The study thus found that the public's 'familiarity' with a particular bank can generate very positive effects even in a crisis situation. This factor acted as a kind of reputational safeguard during the financial crisis, giving the corresponding banks a much better standing in this situation. A potential strategy for banks that are particularly dependent on public opinion would thus be to become more 'familiar' by investing in areas that are not solely connected with financial markets. Some banks have apparently already recognized this and have implemented measures to bring about a corresponding change in their corporate culture. In view of the findings described in the paper, such a strategy could be a practical option for banks looking to improve their reputations or even safeguard these during the next crisis.