Here’s more about the Nobel Prize in Economics and the work of those who bagged it this year

In times when the second largest Swiss bank Credit Suisse is struggling, a research on the role of banking during a financial crisis has secured the Nobel Prize in Economics.

Meet this year’s economic Nobel Laureates

Former US Federal Reserve Chairman Ben Bernanke, along with University if Chicago professor Douglas Diamond and economist Phillip Dybvig, has been honoured with a Nobel for pointing out role of banks financial intermediaries. Bernanke studied the Great Depression of the 1930s, to look at how the banks collapsing played a significant role in triggering of modern history’s worst financial crisis. Meanwhile Dybvig and Diamond collaborated on creating a model, to explain how banks are also more likely to be affected by rumours of a shut down, because if their importance in society.

How banks fall before the greater crash

Bernanke’s observation focused on the financial collapse of the 1930s, when unemployment rates soared past 25 per cent in the US and suicide rates went from 17 per 100,000 people to 22. It turns out that 744 banks failed in the first 10 months of the crisis, as compared to an average of 70 banks failing a year in the 1920s. A whopping 4,000 banks collapsed in the year 1933 alone, as the Great Depression hit its peak.

The trend of bank failures triggering off a financial crisis has remained consistent, as the failure of Lehman Brothers in the US was a pivotal event for the 2008 financial crisis, and other major banks such as Merill Lynch and AIG had to be rescued. Even now, as recession looms on the horizon, falling investor confidence and profitability for Credit Suisse, has triggered speculation about its collapse which could trigger the next economic storm. The rumours have also caused a 60 per cent decline in Credit Suisse’s share prices since the financial year started.

Panic can hurt ailing banks further

Rumours bring us to the Diamond and Dybvig’s work, which looks at how speculation about a shut down can affect banks in our society. The trend has been visible in bank runoffs, where people withdraw a lot of money at an accelerated pace, leading to eventual collapse of a bank. When withdrawals outnumber the funds available at a bank, it affects the operational efficiency of a financial institution. This was seen when a withdrawal limit was placed on Yes Bank accounts amidst a buzz about the debt-laden lender shutting down. News of Punjab National Bank closing shop after a scam also led to crowds outside its branches, that turned up to withdraw money.

Government-backed insurance a game changer

They also showed how deposit insurance offered by the state helps in such scenarios, by reassuring people that their money is safe. In India, every depositor is insured for a maximum of Rs 5 lakh, and in December last year, the Prime Minister also assured 3 lakh people who had lost money in bank collapses, that it will be refunded.

How the Nobel Prize in Economics came to be

The Nobel Prize for Ecomomics is the only honour which wasn’t mentioned in the 1895 will of Alfred Nobel, and was only added in 1968 to mark the 300th anniversary of the Swedish Central Bank, before being awarded to Ragnar Frisch and Jan Tinbergen.

The Economics Nobel has previously been awarded for research in casual relationships as well as empirical contribution to labour economics. In 2018, Indian economist Abijit Banerjee won the prize for an experimental approach to reduce poverty. Celebrated Indian economist Amartya Sen had received a Nobel Prize in the category in 1998, for his work on welfare economics.