Bernanke, 2 economics professors share Nobel prize for studies of financial crises

Former Federal Reserve Chairman Ben S. Bernanke and economists Douglas W. Diamond and Philip H. Dybvig were jointly awarded the 2022 Nobel Memorial Prize in Economic Sciences on Monday "for research on banks and financial crises," the Royal Swedish Academy of Sciences said in a news release.

The three "have significantly improved our understanding of the role of banks in the economy, particularly during financial crises," the academy said in the news release.

Mr. Bernanke analyzed the Great Depression of the 1930s in a paper showing how bank runs were "a decisive factor in the crisis becoming so deep and prolonged," the news release said. Conventional wisdom among experts was that the depression could have been averted if the Federal Reserve had printed more money. Mr. Bernanke, however, showed the main cause of the depression was "the decline in the banking system's ability to channel savings into productive investments."

The paper, "Non-Monetary Effects of the Financial Crisis in the Propagation of the Great Depression," was published in June 1983 in the American Economic Review.

As the academy noted, Mr. Bernanke was "able to put knowledge from research into policy" as chairman of the Federal Reserve from 2006 to 2014, during which time he oversaw its response to the 2008 financial crisis.

In its news release, the academy said Messrs. Diamond and Dybvig in a 1983 paper showed how the conflict between banks allowing depositors to access their money when they wish, while offering long-term loans to borrowers, makes them vulnerable to "rumors about their imminent collapse."

Their paper, "Bank Runs, Deposit Insurance, and Liquidity," appeared in the Journal of Political Economy in 1983. A University of Chicago news release on Monday announcing Mr. Diamond's award, said the "Diamond-Dybvig model demonstrates how banks specializing in creating liquid liabilities (deposits) to fund illiquid assets (such as business loans) may be unstable and give rise to bank runs. It shows how banks' special liabilities, combined with illiquid assets, explain the role of banks, why they may be unstable and why they may need a government safety net (such as deposit insurance) more than other borrowers."

Bruce I. Jacobs, principal at Jacobs Levy Equity Management, said in an email that this year's recipients were recognized for "the scientific underpinnings of banks' critical role as financial intermediaries and the catastrophic consequences to society when they fail."

"The insights of all three laureates played a prominent role in banking legislation that emerged after the 2008-09 crisis. The new regulations increased the amount of capital on bank balance sheets to meet emergencies and expanded the scope of regulation by adopting a 'macroprudential' approach that assesses risks within and beyond conventional banks," Mr. Jacobs said. "The tighter regulation, along with periodic stress testing, and liquidity provided by the Federal Reserve, improved the resilience of the banking system and allowed it to avoid a major calamity during the pandemic, although it did leave behind an inflation problem."

"The Nobel Prize committee credited the insights of Bernanke, Diamond, and Dybvig with helping to ensure that recent crises, including the economic disarray caused by the pandemic in 2020, did not turn into long-term economic depressions," he said.

Mr. Bernanke is currently senior fellow, economic studies, at the Brookings Institition; Mr. Diamond is the Merton H. Miller Distinguished Service Professor of Finance at the University of Chicago's Booth School of Business; and Mr. Dybvig is Boatmen's Bancshares Professor of Banking at the Washington University in St. Louis Olin Business School.