ABSTRACT
Let us return to the mismatch problem on the balance sheet of a bank. Banks issue demand deposits on the liabilities side of the balance sheet. These can be withdrawn at any time. On the other hand, banks hold illiquid loans on the assets side of their balance sheet. So there is a mismatch. We may ask two questions here. First, why do banks issue demand deposits, given that they hold illiquid loans? Second, why do banks not hold liquid assets, given that they issue demand deposits?
