According to the balance sheet channel, possible interest rate changes influence the creditworthiness of borrowers via the evaluation of their assets. Creditworthiness, in turn, influences the premium that borrowers have to pay for external financing, and, thus, economic activity.
While the analysis of the balance sheet channel was originally applied to non-financial institutions, the deepening of financial markets, along with financial innovations, has presumably extended its importance to the household sector as well as to the banking sector.