How would deleveraging affect a bank’s weighted average cost of funds? Our results suggest that if leverage declines, the cost of equity will also fall. For example, if leverage of the average bank halves to 10, the market beta would fall by 10 basis points. This implies that the average equity factor for banks will fall by to . Assuming a 5% cost of debt, the weighted average cost of funds for the bank would be (ie * + *5%). 7 This is only about 40 basis points higher than when leverage is equal to 20, the average.
