Douglas Diamond

The 1983 model by Douglas Diamond and Philip Dybvig shows how banks can finance long-term investments while promising depositors ready access to money. That useful maturity transformation also makes a bank vulnerable if many depositors withdraw simultaneously.

Diamond shared the prize with Ben Bernanke and Philip Dybvig for research on banks and financial crises. Diamond's work explained both the liquidity role of banks and why monitoring borrowers is efficiently delegated to financial intermediaries.

Credible deposit insurance can remove an individual depositor's incentive to rush to withdraw before everyone else. The model therefore supplies a classic rationale for institutions such as the United States Federal Deposit Insurance Corporation.

Delegated monitoring means savers rely on a bank to evaluate and monitor borrowers instead of duplicating that work individually. Diamond's 1984 theory showed how diversification and contractual arrangements can make this intermediary role efficient.