ABSTRACT. Raising interest rates modestly as asset prices rise above what are estimated to be warranted levels can reduce the effects of asset-price bubbles on output and inflation, thereby enhancing macroeconomic stability. A bank's asset portofolio consisting of loans to nonbanks, interbank loans, traded securities, and many other items is funded by debt and equity. From the perspective of systemic stability, the assumption of idiosyncratic shocks might lead to an underestimation of systemic risk.