Attempts to provide a theory of the commercial banking firm have been few. This is because the commercial bank is an institution whose output is difficult to define. Commercial banks, it is felt, provide output when they acquire liabilities by issuing time and demand deposits, and also when they acquire assets by granting loans and pur chasing securities. To date there have been three attempts at de veloping a theory of the banking firm [1] [2] [3]. They all, however, suffer because of two funda mental weaknesses. First, the unrealistic assump tion is made in all three models that the marginal cost of credit, or asset, extension by banks is inde pendent of the credit mix. Instead it is made a function only of the total volume of credit extended. This reasoning ignores the fact that different types of assets entail different costs. Secondly, an equilib rium for banking firm has only been established in the asset market. No general equilibrium, i.e., equilibrium in both the asset market and the li ability market, has yet to be developed. The purpose of this paper is to overcome these omissions from earlier theories by developing a theoretical model that assumes marginal cost is indeed a function of the asset mix and establishing equilibrium in both the asset and liability markets. The framework for the analysis will be to briefly describe, and criticize, the three earlier theories and then to present the more inclusive model of this paper.