The Royal Swedish Academy of Sciences in Stockholm on Monday named Ben S. Bernanke, Douglas W. Diamond and Philip H. Dybvig as the winners of this year's Nobel economics award.
It said the US-based trio won the award "for research on banks and financial crises."
"Fifteen years ago, much of the world stood at the brink of a devastating economic crisis," Tore Ellingsen, chair of the social sciences committee at the Royal Swedish Academy of Sciences, said at a press conference. "Most of us were unprepared for it. However, a few academic economists were both prepared and worried. They had studied the theory of bank runs."
Former Fed Chair among winners
Bernanke is the former chairman of the US Federal Reserve. He led the US central bank from 2006 to 2014, notably during the 2007-2008 financial crisis. In the 1980s, he argued that it was bank runs that caused the Green Depression in the 1930s, which had dramatic repercussions for the global economy.
"His insights broke with conventional wisdom, and now have solid empirical support," the Academy said.
Diamond is a professor of finance at the University of Chicago, where he specializes in the study of financial intermediaries, financial crises, and liquidity. Dybvig is an economist and professor of banking and finance at Washington University in St. Louis. In 1983, the pair developed the Diamond-Dybvig model of bank runs.
The Diamond-Dybvig model
The model shows how the liquidity needs of savers, who want cash on hand, are in conflict with the needs of borrowers, who prefer loans with a long maturity. This is a fundamental tension for banks, which try to channel savings into investments, i.e. loans.
In normal circumstances, this works well: banks can loan money out to borrowers, providing them with a long maturity to pay the loan back, and keeping only a small fraction of cash on hand for its customers' short-term liquidity needs. However, if all depositors try to withdraw their savings at the same time, as they do in a bank run, the banks wouldn't be able to meet all demand and would quickly go bankrupt.
Diamond and Dybvig's model suggests that bank runs are an inherent weakness to the banking system, because the bank's stability depends on what depositors expect other depositors to do. If many start withdrawing their savings, others will want to as well before the bank runs out of cash.
"Financial crises...become worse when people start to lose faith in the stability of the system," Diamond said in a call with journalists following the announcement.
Foundation of modern banking regulation
The trio's academic contributions provided a foundation for modern research on banking, regulation and crisis management, the Academy said. Their insights were "invaluable" during the global financial crisis as well as during the coronavirus pandemic. They are "highly useful for understanding and regulating an ever changing financial system."
The prize in Economics marks the last Nobel Prize to be announced for 2022. The winners in the categories of medicine, physics, chemistry, literature and peace were announced last week. The Nobel Prizes are traditionally awarded on December 10, the anniversary of the death of prize donor and inventor Alfred Nobel, who died in 1896. All Nobel Prizes this year are again endowed with 10 million Swedish kronor (€913,000; $886,00).
Unlike the other prizes, the Nobel Prize in Economics is not directly based on the will of the prize's founder. It was established in 1968 by the Swedish Riksbank in memory of Alfred Nobel and has been awarded since 1969.
Last year, the Canadian David Card, the U.S.-Israeli researcher Joshua Angrist and the U.S.-Dutchman Guido Imbens were honored for their work in the field of experimental economics.
