Ben S. Bernanke, the former Federal Reserve chair, and two other academics were awarded the prize on Monday.
The prize was shared by two economists who created a model that explained the dynamics of bank runs.
Three economists won for their work from the 1980s. Their research looked at how banks become vulnerable to upheaval, how bank failures get worse, and how the system might be made safer.
The findings have been relevant to real-world policy, with central bankers drawing on their lessons from the 2008 financial crisis and the start of the 2020 swine flu epidemic. Mr. Bernanke was the chairman of the Fed from 2006 to 2004.
The research could be relevant again. Central banks around the world are raising interest rates at a rapid pace to combat a burst of inflation which is causing markets to shudder and has already contributed to a meltdown in one corner of the financial system in Britain.
Mark Gertler, a New York University economist, wrote an article about the work of the new Laureates. We are starting to see stress in financial markets as interest rates go up.
The 1983 paper written by Mr. Bernanke explaining how bank failures can cause a financial crisis was cited by the committee. The United States had faced the worst downturn since the Great Depression when he worked at the Fed.
When the housing market began tumbling in 2007, overextended borrowers fell behind on mortgages and a pile of risky loans parceled out across large banks and other institutions began to drag down the financial system. The Fed helped set up emergency programs to prevent markets from collapsing and the Treasury Department used the Fed's power to bail out banks.
The downturn showed how damaging a bank failure could be to the economy. Lehman Brothers collapsed because the Fed and Treasury allowed it to. Critics argue that the investment bank should have been saved and that the downturn was worsened by it.
Louise Sheiner, the policy director for the Hutchins Center on Fiscal and Monetary Policy, wrote in an email that she was absolutely thrilled at Mr. The ideal combination of someone who cares about the real world, has a deep understanding of how it works, uses both real experiences and the insights that he gets from his and others' research, and the confidence and courage to take actions that go beyond the frontier of academic research is what he is
The risks of maturity transformation were written about by Mr. Diamond and Mr. Dybvig. If there is no deposit insurance, banks are subject to sudden, panicked withdrawals by customers.
Kenneth Rogoff, an economist at Harvard University, said that the research is one of the most clear and beautiful papers in economics today.
When banks fail, knowledge about borrowers is lost, making the upheaval worse.
John Hassler, an economist at the Institute for International Economic Studies at Stockholm University and a member of the prize committee, said during the news conference that the Laureates have provided a foundation for our modern understanding of why banks are needed, why they are vulnerable, and what to do about it
Mr. Diamond talked by phone. Mr. Diamond was asked if he had any warnings for banks and governments.
He said that sudden increases in nominal interest rates can set off fears in the system. Make sure that your part of the banking sector is perceived to be healthy, and to stay healthy, and respond in a measured and transparent way to changes in monetary policy.
The research findings of the three economists force each other according to the background documents on the prize. They offer important insights into the beneficial role that banks play in the economy and how their vulnerabilities can lead to devastating financial crises.
Mr. Diamond said at the news conference that the world is better prepared for financial upheaval now than it was during the financial crisis in 2008.
The weaknesses that he and Mr. Dybvig have identified extend beyond banks and can be found in other parts of the financial system.