“Financial Intermediation and Economics” (Nobel Prize 2022)

Abstract

Introduction. The financial system, which is constantly changing due to the emergence of new types of players and new financial instruments, confirms the need for the evolution of financial regulation, which requires a constant analysis of how to build a well planned, efficient and most effective policy. It is the research of 2022 Nobel Laureates Ben Bernanke, Douglas Diamond, and Ph. Dybvig that provides the basis for regulating the financial system and can be used to evaluate various policy instruments aimed at combating economic crises.

Purpose of the article – is to justify the contribution of the 2022 Nobel Laureates in Economics to the development of economic science in the context of their clarification of the role of banks and credit, explanation of the relationship between the real and financial sectors of the economics, justification of the nature of liquidity, interpretation of problem of the mismatch between assets and liabilities and specifics of monetary policy during depressions, definition of prudential norms, introduction of countercyclical buffers, promotion of understanding of monetary policy in general and ways of exiting the economics from crises.

Methods. During the preparation of the paper, general scientific methods of research were used: analysis, synthesis, induction, deduction, mathematical methods, which contributed to the greatest extent to the understanding of the scientific views of B. Bernanke, D. Diamond and F. Dybvig regarding «the role of banks in the economics, especially during financial crises, as well as ways to regulate financial markets». 

Results. The contribution of the 2022 Nobel Laureates in Economics to the understanding of the causes of financial crises and the specifics of the bank activity as financial intermediaries, which are able, unlike households, to evaluate the projects of borrowers much better, monitor the spending of funds and collect debts in case of non-fulfillment of obligations is justified. Such monitoring by banking institutions provides opportunities for efficient «transfer» of savings into productive investments without excessive transaction costs. Accordingly, in the case of mass bankruptcy of banks, the assessment of investments turns into a problem that negatively affects the status of business activity. The ideas of financial banking intermediation are reflected in the Diamond-Dybvig model, the content of which boils down to the fact that, on the one hand, the depositor, using the bank’s services, does not risk losing almost all potential profit in case of need for an urgent return of funds, and moreover, on the other hand, agrees for a slightly lower deposit profit than he could get from an independent long-term investment. Nevertheless, B. Bernanke proved that primarily undermining the ability of banks to transform savings into productive investments determined the depth and duration of the Great Depression.

It is important that in their works the laureates were not limited to a theoretical description of the investigated problems, but supported scientific ideas with appropriate calculations, and their conclusions were embodied in relevant political decisions. Research by B. Bernanke, D. Diamond and Philip Dybvig, according to the Nobel Committee, reduces the risk of financial crises turning into protracted depressions with severe consequences for society.

Discussion. Despite the fact that the works of B. Bernanke, D. Diamond, and F. Dybvig made it possible to systematize and solve many current problems, the area for further scientific research remains open. Given the constant changes in the nature of the financial system, each subsequent crisis creates new challenges for regulators, particularly central banks. For example, despite the fact that the system of guaranteeing deposits and rescuing banks during crises has proven to be definitely effective, however, it can lead to various types of abuse. In addition, it is worth noting that the absence of a single correct algorithm for preventing the occurrence of recessions will continue to encourage scientists to an active scientific research.