STOCKHOLM: The Nobel Prize in Economics was awarded to a US team on Monday for their work on the necessity of preventing bank collapses during financial crises and the role of banking in the economy.
The jury awarded Douglas Diamond, Philip Dybvig, and former US Federal Reserve chairman Ben Bernanke for “substantially improving our understanding of the function of banks in the economy, notably during financial crises, as well as how to manage financial markets.”
The statement said, “Their insights have been of tremendous practical relevance in controlling financial markets and resolving financial crises.”The 68-year-old Bernanke, who served as the US Federal Reserve’s chairman from 2006 to 2014, was praised for his analysis of “the biggest economic crisis in modern history”—the 1930s Great Depression.
Both Diamond, a 1953-born professor at the University of Chicago, and Dybvig, a 67-year-old professor at Washington University in St. Louis, received awards for demonstrating how, by serving as an intermediary, “banks offer an optimal option” for connecting savings to investments.
The two also demonstrated how susceptible these institutions were to ‘bank runs’The Nobel Committee warned that if enough savers rush to the bank at once to withdraw their money, the rumour “may become a self-fulfilling prophesy” and the bank would collapse.Governments may prevent this risky dynamic, the committee continued, by offering deposit insurance and acting as lenders of last resort for banks.
Tore Ellingsen, leader of the Committee for the Prize in Economic Sciences, stated that “the laureates’ ideas have increased our ability to avert both catastrophic crises and costly bailouts.”In a nutshell, the theory holds that while banks can be very helpful, their stability depends on how well they are controlled.
