  A modern version of Monetary Circuit Theory with a particular emphasis on
stochastic underpinning mechanisms is developed. It is explained how money is
created by the banking system as a whole and by individual banks. The role of
central banks as system stabilizers and liquidity providers is elucidated. It
is shown how in the process of money creation banks become naturally
interconnected. A novel Extended Structural Default Model describing the
stability of the Interconnected Banking Network is proposed. The purpose of
banks' capital and liquidity is explained. Multi-period constrained
optimization problem for banks's balance sheet is formulated and solved in a
simple case. Both theoretical and practical aspects are covered.
