The Americans Ben S. Bernanke, Douglas W. Diamond and Philip H. Dybvig were announced this Monday (10) by the Royal Swedish Academy of Sciences as winners of the Nobel Prize in Economics 2022. The laurel was awarded due to studies on banks and financial crises carried out by the trio in the years 1980.
The work of economists was the basis for understanding the role of banks, how to make them less vulnerable and how their collapse can exacerbate economic crises. “His analyzes have been of great practical importance in regulating markets and managing financial crises”, says the entity responsible for the award.
Diamond, from the University of Chicago, and Dybvig, currently at the University of Washington, showed, in 1983, how banks solve an obstacle for the economy to function, by channeling resources from savers to investments. The problem is that while savers want to have immediate access to their money in case of an emergency, companies and borrowers of financing need the guarantee of the fulfillment of the contract, that is, that they will not be forced to pay off their loans in advance.
By receiving deposits from many savers, banks can guarantee depositors instant access to their funds while being able to offer long-term loans to borrowers.
The combination of the two activities, however, makes financial institutions susceptible to rumors about their collapse. In this context, if a large number of customers decide to withdraw their savings simultaneously, the rumor becomes a self-fulfilling prophecy. Situations like this can be avoided if the government is the guarantor of the process, providing deposit insurance and ultimately acting as a creditor for the banks.
Also according to Diamond, as they are intermediaries between many savers and borrowers, banks become the most appropriate institution to assess credit quality and ensure that loans are used for good investments.
As for Bernanke, former chairman of the Federal Reserve, the The Central Bank of the United States, a researcher at The Brookings Institution, analyzed, in a paper also published in 1983, the Great Depression of the decade of 1930, considered the worst crisis economics of modern history. Complementing the studies by Diamond and Dybvig, he demonstrated how bank runs were decisive for the crisis to deepen and prolong.
With the collapse of the banks, valuable information about borrowers was lost. and could not be resumed, which drastically reduced the ability to channel savers’ deposits into productive investments.
“The laureates’ insights improved our ability to avoid serious crises and expensive bailouts ” said Tore Ellingsen, chairman of the Prize Committee in Economic Sciences, in a press release.
The three laureates will equally share a prize of 10 million of Swedish kronor, the equivalent of approximately BRL 4.6 million.