Bank funds management in an efficient market

This paper discusses general principles for choosing bank assets and liabilities, for deciding on when to make a loan and what interest rate to charge, for pricing funds transfer services such as the handling of checks, for establishing compensating balance requirements, and for dealing with government regulation. The discussion assumes markets are efficient and deals first with an unregulated environment and then with policies in the face of regulatory constraints. Most of the policies which would be optimal in an unregulated environment will be optimal in the regulated environment such as in the U.S. today, because it is relatively easy to get around most of the regulations that are applied to banks by the use of non-deposit liabilities, compensating balances and negative checking accounts.