Based on data for the previous few years, John calibrated the long-run target for inflation and the two parameters that determine the responsiveness of the federal funds rate to the two gaps. The equilibrium real interest rate was based on a longer history of actual real interest rates.
Indeed, in an accounting sense, interest expenses would reduce for the same level of funding. And as with most investments, less leveraged businesses earn lower but more stable returns. We anticipate the same for banks to an extent, and past history does indeed suggest there is a relationship (Figure 10).