Why Bank Failures Are Trust Failures

In a recent article published in The Banker, journalist Daniel Flatt argues that every banking crisis is, at heart, a failure of trust, and that regulation is best understood as an effort to decide where trust should sit.

“A banking crisis begins when a shared belief — that others will still be there tomorrow — suddenly gives way,” Flatt writes. “What fails first is not capital, but confidence. And once confidence breaks, even fundamentally sound institutions can unravel with remarkable speed.”

Rather than trying to eliminate risk, Flatt argues, regulators have repeatedly sought to relocate trust to shore up stability. Depending on the era, that trust has been placed in institutions, in rules, in markets, and in models, often alongside an unspoken assumption that authorities will intervene before things spiral. Each fix works, he suggests, until risk accumulates in the parts of the system that trust wasn’t designed to reach.

Post-Global Financial Crisis reforms, he argues, were about credibility. Higher capital and liquidity standards, stress testing, and resolution tools were meant to make failure tolerable and to reduce the need for taxpayer rescues. But Flatt warns that the next fault line is speed: digital withdrawals and social amplification can compress a run into hours, while the demonstrated willingness of authorities to move rapidly risks hardening expectations that intervention will always arrive on time.

“The challenge regulators now face is not simply how to make banks safer, but how to sustain trust in a global system that must be stabilised almost instantly, often without explanation, and increasingly beyond the boundaries of traditional banking itself,” Flatt concludes. “That is the inheritance of the past century, and the problem the next one will have to solve.”

In our 2025 Compendium, Francis Fukuyama, author of Trust: The Social Virtues and the Creation of Prosperity, and Richard Edelman, CEO of Edelman, explored the importance of trust, why it has degraded in recent years, and what can be done to rebuild it moving forward.