Economics Nobel focuses on banks’ role in the economy

3. Economics Nobel
Former Federal Reserve chief Ben Bernanke arrives to speak at a news conference in Washington, DC, on Monday. A US trio composed of Bernanke, Douglas Diamond, and Philip Dybvig won the economics Nobel on Monday for research on banks in times of turmoil. (Photo: AFP)
PARIS — By awarding the economics Nobel to ex-Federal Reserve chief Ben Bernanke and two other US economists, the jury highlighted the importance of research on the role banks play in the economy, both in normal times and during crises.اضافة اعلان

The work that won the Nobel for Bernanke, Douglas Diamond, and Philip Dybvig all date from the 1980s.

The key role of banks
It was in 1983 that the “Diamond-Dybvig model” saw the light of day.

The model explains how banks operate, but also why “bank runs” take place, when depositors rush to take out their deposits and the bank ends up failing.

“Despite this model being relatively simple, it captures the central mechanisms of banking –- why it works, but also how the system is inherently vulnerable and thus needs regulation,” said the Royal Swedish Academy of Sciences, which awards the Nobel economics prize.

The University of Washington St Louis, where Dybvig teaches, said the work was “one of the most widely cited papers in Finance and Economics”.

The model focuses on the essential economic service banks provide due to their intermediation role. Banks accept deposits and then lend the money, both to consumers and to businesses.

While the system functions as long as banks earn more money from lending than they pay in interest to depositors, the system is fragile, as deposits can be withdrawn quickly if confidence in a bank falters. The bank cannot reclaim loaned money fast.

While “runs” on deposits may first happen on banks where suspicions are merited, the model showed it may expand further.

“Even fundamentally healthy banks may get into trouble if such bank runs become widespread,” noted the academy.

Financial crises
Bernanke’s work focused on the Great Depression in the 1930s and exposed “the importance of the credit channel for the propagation of the” crisis, the Nobel committee said.

Until then, bank failures were seen as a consequence, or at best, a secondary cause of economic crises.

Bernanke’s work, however, demonstrated the deep and protracted nature of the Great Depression was “in large part because bank failures destroyed valuable banking relationships, and the resulting credit supply contraction left significant scars in the real economy,” added the academy.

Useful for current crises
The research by the three laureates was also “extremely valuable” to policymakers during the 2008 financial crisis and the Covid-19 pandemic, according to the academy. Their work showed the importance of good banking regulation.

The academy said “the financial market panic had a dramatic effect on the real economy and gave rise to what is today commonly referred to as the Great Recession,” reaffirming the research of the three laureates.

A decade later, policymakers made sure the pandemic did not lead the economy to stall by a shortage of credit when the natural reaction would have been for lenders to hold back due to the heightened uncertainty.

Read more Lifestyle
Jordan News