Olin’s Philip Dybvig awarded Nobel Prize in economics

Philip H. Dybvig, a banking and finance expert at Washington University in St. Louis, is one of three economists to share the 2022 Nobel Prize in economic sciences, the Royal Swedish Academy of Sciences announced Monday, Oct. 10.

Dybvig and University of Chicago Professor Douglas Diamond were selected for their seminal 1983 paper, “Bank Runs, Deposit Insurance, and Liquidity,” which introduced an economic model that explained why banks are subject to runs.

“Philip Dybvig is a brilliant economist whose work has been transformative in his field and has had an indelible impact on our nation’s financial markets and the health of our economy,” Chancellor Andrew D. Martin said. “By helping us to understand the role of banks in the economy, his research has been instrumental in how we respond to financial crises, and attempt to head them off in the first place.

“This is also a momentous day for Washington University. The Nobel Prize is a tremendous honor — first and foremost for the individual recipients, but also for the institutions where they complete their research. We’re extraordinarily proud to have a WashU faculty member recognized in this manner and we’re delighted to celebrate this moment with him.”

Sharing the award with Dybvig and Diamond is Ben S. Bernanke, the former Federal Reserve chair. Bernake also published a paper in 1983 that explained how bank failures can propagate a financial crisis rather than simply being a result of the crisis.

Model stands test of time

The “Diamond-Dybvig model” became synonymous with the study of banking, financial crises, liquidity and bank runs. The paper demonstrated that all bank runs share the same DNA, despite different circumstances and triggers for panics. It has been cited more than 11,000 times since its publication in 1983.

“Our model showed how to view bank runs as rational behavior. If you think everyone else is going to take out their money, you’re going to take out your money, and that’s rational behavior,” said Dybvig, the Boatmen’s Bancshares Professor of Banking and Finance at WashU’s Olin Business School.

“The model shows that the liquidity provision for banks that makes them fragile is also what adds value to the economy. We worked really hard to make the model itself simple and it has become a workhorse model in banking, so it’s not the most difficult thing to do. It’s a model you can extend and still solve things.”

When Dybvig and Diamond created their model in 1983, there hadn’t been a bank run in the United States since the Great Depression, some 50 years or so earlier. When he and Diamond first presented the paper at the University of Pennsylvania’s Wharton School, they received pushback from audience members who believed bank runs were a thing of the past, Dybvig said.

Flash forward to the 2008 financial crisis.

Proud moment for Olin

“The model helped us to understand what we should be doing in a financial crisis. In the crisis in 2008, a lot of things run on banks — money market funds, the repo market, bank commercial paper. These aspects of the 2008 crisis all look very closely like what we wrote about in our paper. Our model gives policymakers a framework for how to think about what was going on,” Dybvig said.

“Phil Dybvig’s winning the 2022 Nobel prize in economics is a proud moment for Olin and WashU,” said Anjan Thakor, interim dean of Olin Business School and the John E. Simon Profesor of Finance.

“With his co-author, Douglas Diamond, Phil published a seminal paper on bank runs in 1983 that provided a rigorous theoretical model of how even an otherwise healthy bank can collapse due to a run on its deposits caused by a coordination failure among depositors. It provided an economic rationale for federal deposit insurance as a way to eliminate this possibility and became a workhorse model for a vast literature to follow on bank runs, panics and financial crises, thereby reshaping banking research on the issue of financial stability.”

Dybvig joined Olin’s faculty in 1990. He previously taught at Princeton University and was tenured at Yale University. He has published two textbooks and more than 35 articles in leading journals.

Dybvig joins a prestigious list of Nobel laureates affiliated with Washington University, 26 in all, many of whom did a significant portion of their award-winning work here. He is the second WashU person to receive the Nobel in economics.

The economics prize was established by Sweden’s central bank and first awarded in 1969, its formal name being the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel. The prize includes a cash award of 10 million Swedish kronor (nearly $900,000) and will be handed out Dec. 10.

Of waking up to the news that he was selected as one of this year’s winners, Dybvig said, “I’m really honored to be recognized along with Ben Bernanke and Doug Diamond. I seem to be the last person to know! I have so many messages on my phone.

“I really wish my PhD adviser Steve Ross [who taught at Yale and later at Massachusetts Institute of Technology] could be here to see this. He should have had a Nobel Prize. He would have been happy to see one of his students receive this.”