Nobel Prize in Economics Warns Against Poor Regulation of Shadow Banking

The American economist Ben Bernanke, awarded this year with the Nobel Prize in Economicswarned today of the need to increase the regulation of the so-called banking in the shadow or parallel (non-bank financial intermediaries) to avoid future economic crises.

“My perception is that after the crisis and the great recession of 2007-2009, great progress has been made in the regulation (of the banking system), in particular with commercial banks (…) My concern is that in the banking on the shadewhich was the original source of the crisis, there have been changes, but not enough,” he said in his award acceptance speech.

Bernanke, who was president of the United States Federal Reserve between 2006 and 2014, stressed that this lack of regulation it is a “problem” and that was revealed in the “very brief but acute” financial crisis of March 2020, caused above all by those intermediaries such as monetary funds or investment banks.

The crisis of the first decade of this century was caused above all by the “financial panic“, recalled Bernanke, noting that although subprime mortgages were not a large asset by themselves, the uncertainty about who was exposed to them frightened the public. banking parallel and, in part, to the commercial one, especially after the collapse of Lehman Brothers.

“Avoiding future crises requires a financial regulation effective in ensuring that lenders are safe and borrowers are not overwhelmed. A macroprudential or system-wide approach to regulation can better identify looming threats,” he said at an event held at Stockholm University.

Awarded with Nobel Prize in Economics

Bernanke’s speech preceded that of his colleagues Douglas Diamond and Philip Dybvig, this year’s other winners of the Economics prize, who spoke for half an hour separately on their theories about the banks and the financial criseswhich have earned them the Nobel.

Bernanke was distinguished for showing that the main cause of the Great Depression of the 1930s was the reduction in the capacity of the Bank System to channel savings into productive investments.

Diamond Y Dybvig jointly developed a theoretical model that explains how banks create liquidity for savers, while borrowers can access long-term financing.

This bank intermediation process also shows its fragility before possible rumors that can cause massive withdrawals of cash, hence the need for governments to guarantee deposits.

“For the system to work it is necessary that the banks be great, be diversified and do not expose themselves to the risks of the economy as a whole,” Diamond said today in his speech.

Dybvig, for his part, influenced the model developed in his day with his colleague, which earned them the Nobel to both, to explain that even when banks may be “healthy”, there can always be good Balance (customers only withdraw money in case they need it) and a bad one (bank panic).

“The role of insurance of deposits and other institutions is to eliminate this bad balance”, defended Dybvig.

Bernanke, Diamond and Dybvig will receive this Saturday in a ceremony at the Konserthus in Stockholm his prize, like the rest of laureates in Medicine, Chemistry, Physics and Literature.

Hours before, another similar event will be held at the Oslo City Hall for the winners of the Nobel Prize Peacea tradition that obeys the will of the creator of the prizes, the Swedish magnate Alfred Nobel (1833-1896), since in his time Norway was part of the Kingdom of Sweden.

All the prizes are endowed this year with 10 million of Swedish crowns (917,000 euros or 962,000 dollars), to be distributed in case there are several winners in the same category.