Alternative approaches to the theory of the banking firm: A note

In his survey and discussion of alternative approaches to the theory of the banking firm, E. Baltensperger claims that M. Klein's result of independence of a bank's optimal asset choice from optimal liability choice is clearly the consequence of the very special assumption that the density function of deposit outflows is independent of deposit composition. This paper examines the conditions under which Klein's result holds, even when the stochastic reserve flows depend on deposit composition. It shows that the independence of commercial loan portfolio size on deposit composition follows from monopolistic competition in the commercial loans market, rather than from the very special assumption which Baltensperger denounces.