Publication Details

Bhati, S. S. (2015). Relation between trust theory and agency theory. In S. Natarajan, M. Ganesh. Babu, B. Nagarjuna & R. Rajkumar (Eds.), Commerce and Management - A Modern Perspective (pp. 57-65). India: Archers and Elevators Publishing House.


The global fmancial crisis (GFC) of 2008 has I:aised many issues in regard to the operations of business, particularly financial institutions. The most important issue is the loss of trust in the way financial institutions work. Some authors have called the economic crisis a crisis of trust (Eichengreen, 2009). Emst and Young (2011) have conducted a global survey of banking industry in the aftermath of GFC. They found that the banking industry in mature markets such as USA, UK, Germany, France and Italy has experienced a shift in customer confidence and trust whereas banking industry in emerging markets such as India, China and Thailand have experienced lesser impact of Global financial crisis. Consequently banks in emerging markets have huge opportunity to expand internationally. Ernst and Young (2011) have observed that trust in banks in countries such as USA, UK, France, Germany, Italy has decreased considerably after the Global financial Crisis ranging from a fall of 51% for banks in Belgium to 61% in UK. They have not observed any change in customers' confidence in the banks in China whereas they have observed an increase in customer confidence in banks in India. Among the reasons cited by customers for reduction in trust levels in banks in mature markets are under capitalisation of banks, over leveraging practiced by some banks and remuneration policies of banks. Two important issues have emerged from the above discussion. One Global Financial Crisis have raised and highlighted the issue of trust in business, particularly in banks as an important issue. The other issue is about agency problem in banks made significant through the remuneration policies pursued by some banks in the lead up to Global Financial Crisis.

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