The Royal Swedish Academy of Sciences has awarded the 2022 Nobel Prize in Economic Sciences ( Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel) to the trio of Ben Bernanke, Douglas Diamond and Philip Dybvig for their research on banks and financial crises.
Bernanke is associated with The Brookings Institution, Washington DC, USA; Diamond is a professor of finance at University of Chicago, IL, USA, and Dybvig is a professor of banking and finance at the Olin Business School of th Washington University in St. Louis, MO, USA.
“This year’s laureates in the Economic Sciences, Ben Bernanke, Douglas Diamond, and Philip Dybvig, have significantly improved our understanding of the role of banks in the economy, particularly during financial crises. An important finding in their research is why avoiding bank collapses is vital,” the academy stated in a press release announcing the winners.
“Modern banking research clarifies why we have banks, how to make them less vulnerable to crises and how bank collapses exacerbate financial crises. The foundations of this research were laid by Ben Bernanke, Douglas Diamond, and Philip Dybvig in the early 1980s. Their analyses have been of great practical importance in regulating financial markets and dealing with financial crises.”
“The laureates’ insights have improved our ability to avoid both serious crises and expensive bailouts,” says Tore Ellingsen, Chair of the Committee for the Prize in Economic Sciences.
In their theory, Diamond and Dybvig show how banks offer an optimal solution to the conflict that comes with channeling savings into investment.
“Savers want instant access to their money in case of unexpected outlays, while businesses and homeowners need to know they will not be forced to repay their loans prematurely,” the academy noted.
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“By acting as intermediaries accepting deposits from many savers, banks can allow depositors to access their money when they wish while offering long-term loans to borrowers.”
Diamond and Dybvig’s analysis also showed how these two activities make banks vulnerable to rumours about their imminent collapse.
“If a large number of savers simultaneously run to the bank to withdraw their money, the rumour may become a self-fulfilling prophecy – a bank run occurs and the bank collapses. These dangerous dynamics can be prevented through the government providing deposit insurance and acting as a lender of last resort to banks,” the press release revealed.
Diamond demonstrated how banks perform another societally important function. As intermediaries between many savers and borrowers, banks are better suited to assessing borrowers’ creditworthiness and ensuring that loans are used for good investments.
Ben Bernanke analysed the Great Depression of the 1930s, the worst economic crisis in modern history. Among other things, he showed how bank runs were a decisive factor in the crisis becoming so deep and prolonged.
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