Yes, that's correct: the bank would no doubt need to have some capital on hand to deal with defaults, and may of course choose to loan its own capital in an unc

Yes, that's correct: the bank would no doubt need to have some capital on hand to deal with defaults, and may of course choose to loan its own capital in an unconstrained manner. A prudent regulator would demand that a bank demonstrate at all times that it can satisfy its duration commitments and, as defaults creep in, insist that bank capital be used and/or raised to cover the shortcomings. Eventually a bank may go bankrupt (although this would be a much slower process than todays panics) and would need to be liquidated via the normal bankruptcy mechanisms. I would expect a healthy secondary market for CDs (or the like) to exist as well.