A New Approach to Bank Capital Channel: The Role of Credit Rating Method in Monetary Transmission Mechanism



Following changes in economic fields, monetary transmission mechanism has been equipped with different approaches. For example, introducing and then applying the first draft of Basel committee’s capital requirement has portrayed new horizon in the monetary transmission mechanism discussions. While as the first step, it has been emphasized on the static role of bank’s capital; as the second step, it has been focused on the dynamic role of this variable (i.e. bank capital channel). However, after formulation and exertion of new Basel capital accord, the importance of bank capital channel revision is observed. In fact, due to the emphasis of new capital accord on credit ratings in the process of risk assessment and regulatory capital setting; as well as differentiate behavior and characteristics of applicable credit rating methods under this regulation; the importance of bank capital channel expansion via credit rating methods is unexpected. Hence in this article, the aforementioned process has been modeled by emphasis on the dynamic programming of a representative bank behavior in monopoly market. The results affirm the critical role of applied credit rating method in setting regulatory capital in monetary transmission mechanism.
JEL Classification: C61, E32, E51, E52, E58, G21