A model is presented with strong neoclassical micro-economic roots. Profit maximization is assumed to be management's goal with the primary external constraint being the regulator's soundness requirement. By solving the model and then determining how the balance sheet would be adjusted in response to a change in regulatory requirements, a first step in analyzing the interrelationship between profits and soundness and the influence of regulation on balance sheet decisions is provided. The means by which a bank increases its soundness depends crucially on the shapes of the supply function for capital, the loan demand function, and the cost of deposits function. As long as banks face imperfect asset and liability markets, the implications of a regulatory move toward generally greater "soundness" go beyond the effects on the safety of the entire system. Both changes in banking structure and in relative bank size are likely to result from a change in regulatory posture.