Current affairs17 Oct. 2022
Financial Crises
Current affairs17 Oct. 2022
The financial sector plays a majore role in modern economies and banks are the cornerstone of the financial system. They mobilies savings for investments create opportunities to pool risks, improve allocative efficiencies, and lover transactiond costs when funds exchange hands between borrowers and lenders. Interestingly, the very mechanisms that enable banks to offer these valuable services are also those which, at times, make banks vulnerable to small shocks and market sentiments, triggering a financial crisis and/or bank run with severe consequences. This year’s Noble Memorial Prize in Economic Sciences has been awarded to three American economists- Ben S. Bernanke, the former Federal Reserve Chair; Douglas W. Diamond at the University of Chicago, and Philip H. Dybvig at Washington University in St. Louis for offering a deeper understanding of the genesis, the propagation, and the management of financial crises. Explaining the ideas of Diamond and Dybvig in their 1983 seminal paper onbank runs is a good begining.