This year’s Nobel prize laureates in economic sciences significantly improved our understanding of the role of banks in the economy, particularly during financial crises, as well as how to regulate financial markets, read a statement issued by the academy.
Why banks exist
Diamond and Dybvig developed theoretical models that explain why banks exist, how their role in society makes them vulnerable to rumours about their impending collapse and how society can lessen this vulnerability.
The duo presented a solution to bank vulnerability, in the form of deposit insurance from the government. When depositors know that the state has guaranteed their money, they no longer need to rush to the bank as soon as rumours start about a bank run.
Diamond also showed how banks perform a societally important function. As intermediaries between savers and borrowers, banks are better suited to assessing borrowers’ creditworthiness and ensuring that loans are used for good investments.
Bank runs
Bernanke, meanwhile, 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.
Using historical sources and statistical methods, Bernanke’s analysis showed which factors were important in the drop in gross domestic product. He found factors that were directly linked to failing banks accounted for the lion’s share of the downturn.
The work done by the trio has has been crucial to subsequent research that has enhanced our understanding of banks, bank regulation, banking crises and how financial crises should be managed, read the statement.
The academy added that the trio’s research reduces the risk of financial crises developing into long-term depressions with severe consequences for society.
Abhijit Banerjee
In 2019, India-born American economist Abhijit Banerjee was awarded the Nobel Prize for economics (along with Esther Duflo and Michael Kremer) for helping to develop an innovative experimental approach to alleviating global poverty.
Unlike the other prizes, the economics award wasn’t established in Alfred Nobel’s will of 1895 but by the Swedish central bank in his memory. The first winner was selected in 1969.
Last year, half of the award went to David Card for his research on how the minimum wage, immigration and education affect the labor market. The other half was shared by Joshua Angrist and Guido Imbens for proposing how to study issues that don’t easily fit traditional scientific methods.
A week of Nobel Prize announcements kicked off on October 3 with Swedish scientist Svante Paabo receiving the award in medicine for unlocking secrets of Neanderthal DNA that provided key insights into our immune system.
Three scientists jointly won the prize in physics on October 4. Frenchman Alain Aspect, American John F. Clauser and Austrian Anton Zeilinger had shown that tiny particles can retain a connection with each other even when separated, a phenomenon known as quantum entanglement, that can be used for specialized computing and to encrypt information.
The Nobel Prize in chemistry was awarded on October 5 to Americans Carolyn R. Bertozzi and K. Barry Sharpless, and Danish scientist Morten Meldal for developing a way of “snapping molecules together” that can be used to explore cells, map DNA and design drugs that can target diseases such as cancer more precisely.
French author Annie Ernaux won this year’s Nobel Prize in literature. The panel commended her for blending fiction and autobiography in books that fearlessly mine her experiences as a working-class woman to explore life in France since the 1940s.
The Nobel Peace Prize went to jailed Belarus human rights activist Ales Bialiatski, the Russian group Memorial and the Ukrainian organization Center for Civil Liberties on Friday.
The prizes carry a cash award of 10 million Swedish kronor (nearly $900,000) and will be handed out on December 10.
(With inputs from agencies)