Award Winner: Best Prepared for the Financial Crisis

– It was a surprise, says Douglas Diamond, connected via a link in connection with the presentation at the Royal Academy of Sciences.

Financial crises are exacerbated when people lose faith in the stability of the system. He says it depends on how profitable the banks are.

Douglas Diamond believes that the world has learned a lot from past financial crises and is better prepared:

The banking system today appears to be solid. But fears of bank outflows and crises can appear anywhere in the financial system. It does not have to originate from commercial banks. He says he could grow up in the insurance sector.

Always the risk of crisis

It is entirely possible to avoid financial crises. There are ways to write contracts and design the financial system so that crises never occur. But one of the points of our study is that this is probably not the best way to deal with this, he continues.

Because it is precisely such contracts that create crises.

The financial system as a whole needs a system of contracts designed to reduce the risk of a crisis, according to Diamond. It could be related to deposit guarantees, and the management structures of banks in crisis.

Bank bailouts may be a problem, but they may be beneficial to society as a whole. “I think we’ll always have a small risk of unexpected crises,” Diamond says.

justification

“This year’s Economics Prize winners Ben Bernanke, Douglas Diamond and Philip Dibvig have improved our understanding of the role of banks in the economy, particularly in financial crises. Their research shows, among other things, why it is important to avoid a bank collapse,” the Royal Swedish Academy of Sciences wrote in the justification .

For the most part, the banks are doing well. But sometimes parts of the banking system fail. It can lead to serious consequences, even financial crises, says Professor John Hasler, one of the members of the prize committee, at the press conference.

Hassler notes that Ben Bernanke in a 1993 report showed how bank inflows led to bank failures.

That’s why they got the award

Their research was behind the crisis response and helped us understand the causes of the 2008-2009 financial crisis and prevented the global economy from entering the same kind of depression as it did in the 1930s.

Their research is not directly related to fiscal and monetary policy. What matters is the regulations. Obviously, the need for such regulations is always greater when the situation in the financial markets is sensitive. That way, you can say it’s time to see if the regulations we’ve put in place now will suffice when the winds start to drop, says Tori Ellingsen, a professor at the Stockholm School of Economics and chair of the award committee. .

Trinidad and Tobago: Is it always right to bail out a bank in a difficult situation?

– They don’t say that. But they say the main rule is that it has to go too far before you let banks fail, at least if it affects the bank’s borrowers. In the event of a bank collapse, business must be allowed to continue, or else there will be dire consequences for the real economy.

sleep better

TT: In what way can their research solve problems in people’s daily lives?

– You could say this, for example, deposit guarantees – a recommendation from this type of research – enable us to sleep more peacefully at night. We know that even in the event of a bank failure, our deposits up to a certain amount are guaranteed by the state.

TT: Why did you choose to praise this kind of research at this time?

– I would say that – when we look at the data from 2008 onwards – it becomes very clear how right these researchers were. This has made us even more convinced of how important this research is. In short, the evidence is strong enough now.

Prize winners share ten million crowns.