Diamond and Dybvig were awarded the prize for their modelling of how shocks to financial markets can lead to selffulfilling crises and bank runs, so safety nets (like a lender of last resort function from central banks and deposit insurance from government) are needed8.
But in providing such safety nets, moral hazard is created and financial regulation is needed to ensure this is not exploited9. This has implications for any financial intermediary that engages in liquidity transformation, and not just banks. We all saw the systemic concerns caused by Covid-related stress in March 2020.