(5) The loan interest rate is set as a mark up over marginal cost, which are a weighted average of the deposit rate and the return on bank equity. The weights are determined by the constraints on the bank balance sheet imposed by capital requirements. Notice also, actual and expected losses as well as government relief measures do not appear in the loan interest rate rule since it is assumed that these losses relate to past loan supply decisions of banks. The stock market equalises rates of return on bank and physical capital by applying the same stochastic discount factor to financial and non financial sector capital.
.
and 
are given by
