Economics, Governance
In news: The Economics Prize for 2022 has gone to Ben Bernanke, Douglas Diamond and Philip Dybvig for their research related to how banks function.
- The foundations of this research were laid by them in the early 1980s
About:
- Modern banking research clarifies the importance & vulnerabilities of banks, role of banks in the economy especially during a financial crisis.
- Their analyses have been of great practical importance in regulating financial markets and dealing with financial crises.
- The laureates’ insights have played an important role in ensuring crises such as covid pandemic did not develop into new depressions with devastating consequences for society.
Ben S Bernanke:
- Bernanke demonstrated how failing banks played a decisive role in the global depression of the 1930s. The collapse of the banking system explains why the downturn was not only deep, but also long-lasting.
- It added the importance of well-functioning bank regulation.
- Conflict: savers want instant access to their money in case of unexpected outlays, while businesses and homeowners need to know they will not be forced to repay their loans prematurely. This creates the fundamental problem of volatility in banks and vulnerability to shocks such as in case of bank runs.
Douglas W Diamond and Philip H Dybvi:
- The model captures the central mechanisms of banking, as well as its weaknesses.
- They argue, that banks emerge as natural intermediaries that help ease liquidity.
- They discuss how banks need to be more careful about assessing the loans they give out, or how bailing out banks in crisis might turn out to be and how the financial markets should be regulated to fulfil their function – channelling savings to productive investments without causing recurring crises – is a question that researchers and politicians continue to wrestle with.
- This reduces the risk of financial crises developing into long-term depressions with severe consequences for society, which is of the greatest benefit to us all.
Miscellaneous:
- A bank run may happen where many savers try to withdraw their money at once, which can lead to a bank’s collapse. For example, when people were unable to withdraw their money from a few rural banks in China earlier this year, they witnessed bank runs.
About Nobel Prize:
- Nobel Prizes are a group of five separate prizes awarded to “those who have conferred the greatest benefit to humankind.
- Named after, Alfred Nobel, a Swedish chemist, engineer, and industrialist most famously known for the invention of dynamite.
- Nobel Prizes were first awarded in 1901.
- The prizes carry a cash award of 10 million Swedish kronor (nearly $900,000).
- The money comes from a bequest left by the prize’s creator, Alfred Nobel, who died in 1895.
Source: Indian Express
