This study is a contribution to the development of the theory of bank portfolio selection behaviour. A central idea in the study is that this behaviour can be explained to a large extent by liquidity considerations which banks make in view of the partly uncontrollable and partly unforeseeable fluctuations which occur in their deposits and to a certain extent, also in their loans. This idea was presented originally in a now-classic article by Edgeworth entitled "The Mathematical Theory of Banking" which was published in 1888 and which has been the basis for a number of studies published in the past few decades. In the present study Edgeworth1s approach is developed in a number of different respects. At the same time, it is integrated with two other significant theory formations regarding banks' portfolio selection behaviour: (i) the well-known theory of the bank system's credit multiplier process which is found in many textbooks, and (ii) the related theory of the adjustment in the bank system's free reserves. Special attention is given to the effects of monetary policy. / digitalisering@umu