of central bank balance sheets involves tradeoffs between monetary policy and financial stability …

taking bad assets off bank balance sheets, or can one wait till the crisis is over? We argue that an “overhang” of impaired …

their investors. We show the bank has to have a fragile capital structure, subject to bank runs, in order to perform these … functions. Far from being an aberration to be regulated away, the funding of illiquid loans by a bank with volatile demand … such as narrow banking and bank capital requirements …

deposits excessively fragile in which case there is a role for outside bank capital. Greater bank capital reduces liquidity … creation by the bank but enables the bank to survive more often and avoid distress. A more subtle effect is that banks with … different amounts of capital extract different amounts of repayment from borrowers. The optimal bank capital structure trades …

, where banks make loans repayable in goods and depositors hold claims on the bank payable on demand in goods. Aggregate … production may be delayed in the economy. If so, we show that the level of ongoing bank lending, and hence of aggregate future … reduction of total output. A number of inefficiencies including bank failures can result if deposits turn out to be too high. We …