Add to ORKGThe financial friction is shown to depend on the corporate balance sheet condition, bank capital ratio, and liquidity premium. Given the banks' liability composition is constant, the higher the liquidity premium, the larger is the EFP. Similarly, given the liquidity premium is constant, EFP is larger when higher proportion of loans is produced or financed with bank capital. Based on this framework, we are able to establish the link between the bank capital channel and the model's transmission mechanism subject to exogenous shocks. Results indicate an active bank capital channel amplifies and propagates the monetary policy shocks (demand shock) while it attenuates and dampens the technology shocks (supply shock) when households' ...