This work develops a portfolio model of the banking firm where both the size and composition of the portfolio are jointly determined. The model provides a micro-foundation of the credit channel of transmission of monetary policy. It allows to analise the pricing policies of the banking firm, and shows how interest rate shocks and credit quality shocks (the real shocks that change expected default costs) affect the equilibrium level of loans and deposits. Besides it shows the factors affecting the provision of insurance services by means of the smoothing of shocks.
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