The American West is the fastest growing region in the United States. It also has a significant portion of the region that is arid and is currently experiencing an extensive drought. The drought may continue for many years to come. Water development in the western U.S. has traditionally been aimed at ensuring water supplies in the face of climatic and anthropogenic change. However, the development of “new” supplies through reservoir development and other infrastructure will no longer be possible. Essentially water that has always been scarce is becoming scarcer. This ever-increasing scarcity is contributing to an increasing number of conflicts between traditional water users such as farmers and ranchers and environmental and recreation users, while urban demand continues to increase. Water 2025: Preventing Crisis and Conflict in the West addresses these issues and calls for the development of water markets and banks for the reallocation of water in order to more efficiently provide water amongst the competing needs. The 2025 U.S. Department of Interior publication calls directly for the development of water markets and banking systems to address the ever-increasing water shortages in the Western U.S. Researchers at the Desert Research Institute (DRI) are conducting research within the U.S. National Science Foundation (NSF) Science and Technology Center (STC) for Sustainability of semi-Arid Hydrology and Riparian Areas (SAHRA) aimed at developing an integrated physical and engineering hydrologic model for the purpose of investigating the feasibility of water banking and markets in the Rio Grande watershed. The main components of the integrated model include a detailed representation of system behavior in (1) headwater areas (snow accumulation and melt); (2) surface reservoirs and conveyance systems (operational surface reservoirs, river routing, and diversions/returns); (3) regional and near river aquifers; (4) agricultural demand and uses; and, in future work, (5) urban and industrial demand and uses. Existing models of several of these components have been identified and are being included, to some degree, in the initial integrated model. Coupling of existing and new models of each component to create the final completely integrated model requires a detailed understanding of the problem requirements (what questions are being asked) and the data (what information is available in the hydrologic data). Once developed and tested, the integrated model will be used with an economic “Market” model and “Behavior” model to investigate several water market and banking scenarios. The integrated physical model will need to be sufficiently distributed to allow for the tracking of water movement, possibly at the ditch level for an irrigation district. The model may need to be tightly coupled to account for ground/surface water. Whether, in fact, this needs to be done, will depend on the specific scenarios that are to be tested and explored. The engineering/infrastructure module must represent the capabilities of water movement and storage for the hydrologic setting of the water bank. The institutional module will consist of the legal and regulatory framework. Finally, the economic module will be a trading institution. All of these models must be coupled and interactive for a true water banking system to exist and represent the actual physical hydrology with legal/economic institutions for water resources management. The linked models will be used to study feedbacks between physical processes, water resources management institutions and economic decisions. Once the component modules are developed and tested, they will be used for scenario analysis, all within the context of water markets and banking as policy solutions to allow for more efficient reallocation of water in semi-arid environments. It is hoped that this effort will represent a significant step for water resources systems, and the experience gained is expected to guide development of more robust interfaces which can inform policy. The work described in this paper represents the current state of the development of the integrated hydrologic model.