We study the interactions between the two roles of commercial banks as payment intermediaries and credit intermediaries. Deposits serve as a medium of exchange, and depositors with liquidity shocks may pay with deposits for real consumptions without withdrawing cash from the banking system....

Interconnected banks are prone to the propagation of negative shocks. In a network with banks borrowing from each other using collateral, the risk of financial contagion leads to the emergence of multiple equilibria, featuring different sizes of loans and collateral haircuts. Safe assets are...