Bank / Credit Union

Former Fed chairman wins Nobel Prize for bank research

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October 11, 2022

Ben Bernanke, former chairman of the Federal Reserve, has won a Nobel Prize in Economics alongside economists Douglas Diamond and Philip Dybvig for research on bank failures and how to prevent them.

Bernanke conducted research on how bank collapses prolonged the Great Depression in the 1930s and, as Fed chairman, he used those lessons to create emergency lending programs during the recession of 2008 to 2009, according to a NPR report.

His research focused on how banks can create a booming economy by moving cash from depositors to borrowers to build houses, factories and businesses. However, this can cause a problem with depositors want access to their funds immediately, but those funds are all tied up in assets or investments.

"If a rumor starts that people are going to take out their money from the bank, then everyone has an incentive to rush to the bank to take out money in time and not come last in line," John Hassler of the Royal Swedish Academy of Sciences stated while announcing the prize. "This can create failing banks."

Governments can help prevent such collapses by providing insurance deposits as well as requiring banks to hold a certain amount of cash and by using the Fed as a lender during emergencies.

"The ideas that we today recognize have proven to be invaluable also in modern times," Hassler said. "Even though the financial crisis had large consequences, neither that nor the COVID pandemic led to depressions like in the '30s."

Diamond said banks are now better prepared to handle these events, but a mismatch in timing between borrowers and lenders can still cause issues.

"I think we will probably always be subject to low-probability, unexpected crises," Diamond told the news outlet. "The problem is these vulnerabilities of the fear of runs and dislocations and crises can show up anywhere in the financial sector. It doesn't have to be commercial banks."