Diamond-Dybvig model

economics

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July 22, 2026

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The Diamond-Dybvig model is a foundational concept in economics that explains the essential functions of banks and their vulnerability to bank runs. Developed by Douglas Diamond and Philip Dybvig, the model highlights how banks transform depositors' savings into long-term investments, thereby generating liquidity and enabling economic activity. However, this function makes banks susceptible to rumors of collapse, which can trigger bank runs and financial panics. The model also demonstrates that government-backed deposit insurance can prevent such runs by reassuring depositors. This research, which earned Diamond and Dybvig the Nobel Prize in Economics, forms the basis for modern bank regulation and understanding financial crises.12

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Douglas Diamond
The Diamond-Dybvig model, as it has come to be known, was cited in complementary and concurrent research on the Great Depression by Bernanke, which showed how bank runs beginning in 1929 transformed an ordinary recession into an economic catastrophe. Diamond was also recognized for theoretical work…
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The Diamond-Dybvig model, as it has come to be known, was cited in complementary and concurrent research on the Great Depression by Bernanke, which showed how bank runs beginning in 1929 transformed an ordinary recession into an economic catastrophe. Diamond was also recognized for theoretical work…
Read More

Philip Dybvig
The Diamond-Dybvig model, as it has come to be known, was cited in complementary and concurrent research on the Great Depression by Bernanke, which showed how bank runs beginning in 1929 transformed an ordinary recession into an economic catastrophe.
Read More
The Diamond-Dybvig model, as it has come to be known, was cited in complementary and concurrent research on the Great Depression by Bernanke, which showed how bank runs beginning in 1929 transformed an ordinary recession into an economic catastrophe.
Read More