Ben Bernanke, Douglas Diamond, and Philip Dybvig
Citation: For research on banks and financial crises.
The key idea
Banks are essential because they transform short-term deposits into long-term loans — but this maturity transformation makes them inherently fragile to runs (Diamond-Dybvig). The Great Depression became a catastrophe because the banking system failed (Bernanke).
The explanation
Diamond-Dybvig (1983) modelled bank runs as a multiple-equilibrium phenomenon: confidence in the bank means deposits stay, doubt means runs even of fundamentally-solvent banks. The model justifies deposit insurance. Bernanke's 1983 paper showed that the Depression's bank failures destroyed the information capital of the credit system, propagating real-economy damage well beyond the monetary contraction Friedman documented.
Why Africa should care
Diamond-Dybvig explains African bank runs with painful precision: Imperial Bank Limited placed under receivership by CBK on 13 October 2015 (KES 70.3bn in assets, 50,000 depositors affected) and Chase Bank Kenya placed under receivership on 7 April 2016 over under-reporting of insider loans. The Kenya Deposit Insurance Corporation (KDIC) is the textbook policy response. Bernanke's analysis applies to broader African contagion episodes — Ghana's 2017-2019 banking crisis, in which the Bank of Ghana revoked nine universal-bank licences (Capital Bank, UT Bank, Unibank, Royal Bank, Beige, Sovereign, Construction, plus two more in 2019), with over 40,000 jobs lost. Current Kenyan bank-consolidation debates and SARB resolution-framework discussions are grounded in exactly this framework.
How to use it
When a bank shows the early signs of stress (deposit outflows, falling capital), the right policy response is fast and decisive — exactly because Diamond-Dybvig's multiple equilibria can flip quickly. Slow regulatory action is the worst of both worlds.
Canonical works
- Douglas W. Diamond and Philip H. Dybvig (1983) "Bank Runs, Deposit Insurance, and Liquidity" Journal of Political Economy
- Ben S. Bernanke (1983) "Nonmonetary Effects of the Financial Crisis in the Propagation of the Great Depression" American Economic Review
- Blankson et al. (2022) "Ghana banking crisis 2017-2019: causes and remedial measures"
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