The Halo Effect in Banking: Evidence from Local Markets

This study investigates depositors’ reactions to the performance of small local banks in Poland. I provide evidence that clients respond to their bank’s profitability, but at the same time their predisposition toward their bank improves with positive information about the performance of other local banks that use a similar logotype. Additionally, depositors of a relatively poor local bank tend to switch to its neighboring peers, and these depositors eventually prefer banks that only appear dissimilar to their troubled bank. In general, the research outcomes allow for the conjecture that the observed phenomena resemble the halo effect, in which knowledge with little analytical value for depositors’ decisions nevertheless affects them. The findings have managerial and policy implications. They prove that a bank’s apparent similarity to profitable neighboring peer institutions can be utilized to stimulate its clients’ trust, and apparent similarity or dissimilarity of deposit institutions can play a significant role while understanding the mechanism of bank runs.