Ex-Fed Chair Bernanke, Two Other U.S. Economists Win Nobel Prize for Bank Research

Former Federal Reserve Chair Ben Bernanke and two other U.S economists, Douglas Diamond and Philip Dybvig, won the Nobel Memorial Prize in Economic Sciences for work over the course of four decades on the role that bank bailouts play in financial crises.

Research on Banks and Financial Crises

The trio were awarded the prize Oct. 10 for research on bank regulation and the use of public funds to bail out failing lenders in times of economic turmoil as well as how to prevent even deeper crises. In particular, the Royal Swedish Academy of Sciences said they showed how governments can use deposit insurance and act as a lender of last resort to head off bank runs that are often “a self-fulfilling prophecy” as rumors fuel simultaneous withdrawals by customers.

The Academy cited their work as central to how central banks and regulators responded to the Great Recession and turmoil surrounding the COVID-19 pandemic, establishing that “avoiding bank collapses is vital.” During the Great Recession, Bernanke, the Fed Chair at the time, said the best option for investment bank Lehman Brothers was to let it collapse because it couldn’t legally be saved. Bernanke, Diamond, and Dybvig’s more recent research represents a shift in approach.

Implications for Current Economic Climate

The Nobel laureates’ research is timely both for its implications for financial crises of the last two decades and also because of a background today of significant inflation and rising interest rates. They demonstrated ways thank bank runs were a “decisive” factor in deepening and lengthening the Great Depression and said risks can be reduced by using “delegated monitoring,” in which banks are intermediaries between borrowers and savers. Such tools may help minimize the severity of the current economic turmoil.

Bernanke, Diamond, and Dybvig will equally split the prize of SEK10 million, or about $880,000.