What Drives Repo Haircuts? Evidence from the UK Market
62 Pages Posted: 22 Aug 2019 Last revised: 27 Jan 2025
Date Written: January 30, 2019
Abstract
Using a unique transaction-level data, we document that only 61% of bilateral repos held by UK banks are backed by high quality collateral. Banks intermediate repo liquidity among different counterparties, and use CCPs to reallocate high-quality collaterals among themselves and exploit netting benefits. Furthermore, maturity, collateral rating and asset liquidity have important effects on repo liquidity via haircuts. Counterparty types also matter: non-hedge funds, large borrowers, and borrowers with repeated bilateral relationships receive lower (or zero) haircuts. Furthermore, we observe a pecking order in the posting of collateral, with higher quality one more likely to be used first. Overall, the evidence supports a first order role of information frictions in driving haircuts. In contrast, we do not find significant roles in the data for lenders’ liquidity position or default probabilities.
Keywords: repurchase agreement, systemic risk, repo market, margin, haircut.
JEL Classification: G12, G21, G23, E43, E58
Suggested Citation: Suggested Citation