Guwahati: Ben S. Bernanke, Douglas W. Diamond, and Philip H. Dybvig will receive the 2022 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel “for research on banks and financial crises,” according to the Royal Swedish Academy of Sciences.
Ben Bernanke, Douglas Diamond, and Philip Dybvig, this year’s economic sciences laureates, have greatly increased our knowledge of banks’ contributions to the economy, notably during financial crises. A key finding of their study is the significance of preventing bank failures.
The purpose of banks, ways to make them less vulnerable in crises and how bank failures worsen financial crises are all made clear by contemporary banking research. Ben Bernanke, Douglas Diamond, and Philip Dybvig laid the groundwork for this study in the early 1980s. Their studies have been extremely useful in terms of managing financial crises and regulating the financial markets.
Savings must go toward investments for the economy to run smoothly. There is a tension here, though: savers desire immediate access to their funds in case of unforeseen expenses, while businesses and homeowners need assurance that they won’t be required to pay back their loans early. Diamond and Dybvig’s hypothesis demonstrates how banks provide the best solution to this issue. Banks can give depositors access to their money whenever they choose by serving as intermediaries that accept deposits from various savers and provide long-term loans to borrowers.
Their analysis also shown how the combination of these two activities leaves banks open to rumours about a potential collapse, though. If several savers rush to the bank at the same time to take their money, the rumour may prove true, leading to a bank run and the bank’s collapse. The government’s provision of deposit protection and its role as a lender of last resort to banks can stop these risky trends.
Diamond gave an example of another crucial task banks carry out for society. Banks are better adapted to determining a borrower’s creditworthiness and ensuring that loans are utilised for wise investments because they act as middlemen between numerous savers and borrowers.
The worst economic catastrophe in recent history—the Great Depression of the 1930s—was examined by Ben Bernanke. He demonstrated, among other things, how bank runs were a key reason why the crisis deepened and lasted so long. Important information about borrowers was lost when the banks failed and was difficult to recover. As a result, society’s capacity to allocate savings to profitable investments was significantly reduced.
Tore Ellingsen, Chair of the Prize Committee for the Prize in Economic Sciences, states that “the laureates’ insights have increased our ability to avert both catastrophic crises and expensive bailouts.”