This year’s Nobel in economics is a warning for bank management!

The three economists, who won the Nobel Prize this year for their contributions to the analysis of the financial sector, worked on the relationship between financial crises and banking sector management. All three are in their seventies and their research dates back to the early 90s. 

Their research is not only beneficial for developed countries but guidance can be obtained from their work in determining the management policies of the banking sector of less developed countries as well.

Earlier, two economists in 1997 and three economists in 2013 were jointly awarded the Nobel for their analysis of the financial sector. But all of their research was tied to the dynamics and the ups and downs of the stock market.

All those analyses are considered to be of little use in preventing or predicting stock market crashes as trading patterns of the stock market cannot be explained only by the rational behaviour of the economy. That is why a new type of economics called "Neuro-economics" is now being researched.

But the work of this year's Nobel laureates focuses on the role of commercial banks in the financial sector and their analysis is much more pragmatic, which can play an effective role in preventing the possible collapse of the banking system.

Among the issues they analysed were the crisis of depositors' confidence in the banking system, the importance of due diligence in granting loans, and caution about bank liquidity and capital shortfalls. 

They also analysed the issues of adequate deposit insurance to keep troubled banks afloat and the government's heavy cost burden to save the bank that became bankrupt after failing to be cautious in time.

It should be noted that caution in all these matters is necessary for the banking sector of Bangladesh. As far as I can remember, only Tk 1 lakh per deposit is insured in our banks. Already there have been cases of salvaging banks from bankruptcy. There have been many discussions about the management weakness in many banks and the lack of competence in regulatory agencies, but the situation seems to be not improving much.

The problem of the banking sector is not easily visible because there is no alternative to depositing money in the bank. But when a disaster occurs, the entire economy pays a heavy price. This year's Nobel Prize has brought a warning message for bank management in many countries.

[The author is an economist and former adviser to the caretaker government of Bangladesh. The essay was taken from his Facebook post]