DOuglas Diamond and Philip Dybvig received this year’s award Nobel Prize in Economics for one of the most cited financial economics articles in the academic literature [en compagnie de Ben Bernanke, ancien président de la Réserve fédérale entre 2006 et 2014].
This 1983 article justifies the “maturity transformation” carried out by the banking sector. Banks lend in the long term and finance themselves largely in the short term, whether by using customer deposits or by taking on short-term debt on the financial markets. This transformation of maturity is a considerable amplifier of all major financial crises, that of 2007-2009 being no exception.
Savers love liquidity
During a crisis, in fact, short-term lenders panic and interrupt their financing even though the banks do not have the means to repay them, the funds being lent on a long-term basis.
Why then do banks carry out this massive work of maturity transformation? And should they be forced to limit this dangerous activity, which contributes to the aggravation of financial crises?
There has always been a fairly natural answer to this question. Banks do this because savers like liquidity (the immediate availability of their money); they therefore favor short-term investments. The banks thus render a considerable service by carrying out this transformation, and it would be counterproductive to force them to limit it. We must even help them by guaranteeing deposits, including very large deposits, and if necessary by coming to their aid when they encounter financing difficulties.
Obviously, this old response from most economists enchanted the banking profession, which was thus granted a possible drawing right on public finances. But this analysis remained quite intuitive and literary.
A wolf, or rather several
The contribution of Diamond and Dybvig is, forty years ago, to have proposed a formalized analysis which, for the first time, rigorously validated, according to them, these old intuitions. The article is indeed mathematically rigorous… but rather difficult to read. Economists accepted the claim of the authors, and got into the habit of systematically including it in their bibliography. Hence the Nobel Prize.
But there is a wolf, or rather several.
The old intuition forgot that there is another way to recover your money: you can resell securities on the financial markets, in particular medium or long-term securities that banks issue in addition to deposits to finance themselves in a more stable way. , but also more expensive. Or ask for example the redemption of a life insurance contract that the insurance company will have invested in the long term.
You have 57.77% of this article left to read. The following is for subscribers only.