In the wake of 2008, rebuilding the global financial system is understandably hinged on its ability rebuild trust in the market. Financial service firms must learn to trust their peers in order to trade freely in the same way citizens must trust their banks instead of stuffing their mattresses with Benjamin Franklins.
Quantifying that trust and understanding how it is earned and lost it is a critical element in measuring success. To that end, Thomson Reuters' appropriately named TRust Index is intended to provide a measures of trust to enable insight and foster constructive dialogue.
"Trust in the financial system is the lifeblood of the markets" says Sallie Krawcheck, former president of the Global Wealth & Investment Management division of Bank of America, in the Q2 press release. "While re-regulation of the sector is an important step in this direction, it is the actions of the banks themselves, and a focus on their clients and long-term results, that will result in a lasting restoration of their good standing."
Measuring TrustThe quarterly TRust Index is a fact-based and data-driven series of quarterly proprietary benchmarks built on Thomson Reuters data, news and analytics capabilities. The index is tracking trust for the top 50 global financials based on market capitalization.
Data from the second quarter of 2013 shows regional variations in trust and confidence in financial institutions, however overall trust has remained relatively stable since the first quarter. "The rise of Europe and declines in the Americas and Asia this quarter, while modest, show that it is highly influenced by macro-economic developments, central bank policies, market conditions and regulatory climate," reports Thomson Reuters' Financial & Risk President David Craig.
Can We Trust the TRust Index? Main Street vs. Wall StreetBut what about the non-banks? Sure, corporations are recognized as citizens, but are the opinions of the public, you know the people of flesh and blood, accounted for in the data?
The short answer is no. Yet Thomson Reuters would argue the index complements a Main Street consumer view. After all, the metrics are drawn from aggregate views of professional investors, journalists, analysts and other industry players. In the broadest sense, every one of those professionals is a banking consumer and a participant in the global economy that relies on stability and trust.
[Financial Services Trust Index Debuts ]
Furthermore, the index's sentiment analysis draws from news and social media outlets that are fueled by individual contributors. According to Eben Esterhuizen, CFA, founder and CEO of data analytics company Contextuall, sentiment analysis is done today by focusing in on the influencers. Think of Jim Cramer, Jack Dorsey, Richard Branson, CNN, Gawker. Thomson Reuters analysts confirmed they do not breakdown personal versus corporate social media sentiment.
Millions of Americans use Twitter each week, a smaller percentage of that population tweets regularly. Fewer will be opinionated, and even fewer will discuss finance. "You're grabbing small samples from the big pie, so you always assume that small pie is reflective of the group, especially if you look at the historical trends,” says Eben. "Combining frequency, like a sudden increase in references to a company, with sentiment can be very indicative of the overall sample."
Admittedly, there are problems when you look at sample bias because a CEO's tweet won’t necessarily reflect the opinion of all Americans, but it's better than not having any data at all. "There are great benefits to automated real-time sentiment data. It is certainly more valuable than the traditional market research tools that require a lot of time and expense to produce."
TRusting The DataThe TRust index is compiled with data from a variety of sources. For the most recent quarter the sources and findings were are follows:
Sentiment Analysis: Reuters draws on news and social media sources to illustrate the decline and improvement in trust. Data shows the events starting in 2013 have triggered a significant positive shift in media sentiment, nearing levels prior to the 2011 US debt downgrade. In the second quarter sentiment toward the top 50 global financial institutions were relatively stable.
Notably, on a regional level, Asian financials peaked in May and then declined party due to China's shadow banking system and liquidity squeeze from China's central bank. Trust in the Americas dipped over fears of quantitative easing and rising interest rates. Privatization of UK banks helped raise European sentiment.
Confidence of the Marketplace: This data set measure analysts expectations for financials relative to other sectors. "Analysts continue to have high expectations for the top 50 financials as earnings growth estimates for the second quarter and a 5 year earnings growth rate of 8.1% show; however a -3.4% implied 5 year growth rate shows the market continues to discount the group relative to analyst growth expectations."
Counterparties: Credit spreads are used as an indicator of trust. A relative tightening of spreads signals confidence in the top 50 as reliable counterparties. "Our trust analysis shows spreads are widest for European firms in the index likely reflects relative evaluation of firms which are located in or highly exposed to the euro."
Controversy/Governance: This is an analysis of environmental, social and governance (ESG) data for the top 50 global financials compared to the financial sector. This helps to track firms involved with controversies over the past three years. Furthermore, Thomson Reuters applies an analysis on the adoption of corporate governance policies around fair competition, responsible marketing and avoidance of bribery and corruption practices.
Relative to the overall financial sector the top 50 global financial have a significantly higher percentage of controversies. They also have a significantly higher adoption of corporate governance policies.
Regulation: This data set is a new to the TRust Index. "The proliferation of regulations over the past two years has had clear implications for the financial sector in terms of compliance burden," explains Thomson Reuters in a TRust Index press release.
The volume of regulatory alerts each year is rapidly increasing. Data shows the highest number of alerts in North America, followed by Asia and UK/Europe.
More on the methodology and sources can be found here.
"By looking at trust through a range of analytical lenses, we are able to see not only the high-level developing trends, but the underlying currents beneath them as different participants in various regions reflect different views," said Scott McCleskey, global head of regulatory intelligence, Financial & Risk in a news release. "These trends are certainly worth watching as we move through the third quarter." Becca Lipman is Senior Editor for Wall Street & Technology. She writes in-depth news articles with a focus on big data and compliance in the capital markets. She regularly meets with information technology leaders and innovators and writes about cloud computing, datacenters, ... View Full Bio