There has been long determined and interest on the role of banks in the transmission of monetary policy and business cycle. For example, Keynes (1936) found that money plays an important role to economic growth. Furthermore, Gurley and Shaw (1995) began to redirect attention toward the overall interaction between financial structure and real activity, emphasizing financial intermediation, and particularly the role of financial intermediaries in the credit supply process as opposed to the money supply process.

However, Bernanke and Blinder (1988) produced another view that looked into the assets side as a monetary policy channel to influence the economic activities. For example, in a monetary contraction, banks’ reserves decrease because of reserve requirements and hence reduce the deposits. Consequently, it may increase the short-term and long-term interest rate and also reduce the supply of bank loans. If bank-dependent borrowers are dominant, thus it will reduce the investments and thereby in economic activity. This view, known as balance sheet channel, is further argued by Bernanke and Gertler (1989). They claim that monetary policy can also affect a borrower’s financial position or net worth, thereby influencing the costs of external finance to the borrower (arising from the loss of creditworthiness). Consequently, the monetary policy can affect the borrowers’ investment and spending plan.