What Drives Repo Haircuts? Evidence from the UK Market

55 Pages Posted: 22 Aug 2019 Last revised: 3 Feb 2023

See all articles by Christian Julliard

Christian Julliard

London School of Economics & Political Science (LSE) - Department of Finance; Centre for Economic Policy Research (CEPR)

Gabor Pinter

Bank for International Settlements (BIS)

Karamfil Todorov

Bank for International Settlements

Kathy Yuan

London School of Economics & Political Science (LSE) - Department of Finance

Date Written: January 30, 2019

Abstract

Using a unique transaction-level data, we document that only 60% 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. Furthermore, maturity, collateral rating and asset liq- uidity have important effects on repo liquidity via haircuts. Counterparty types also matter: non-hedge funds, large borrowers, and borrowers with repeated bilateral rela- tionships receive lower (or zero) haircuts. The evidence supports an adverse selection explanation of haircuts, but does not find significant roles for mechanisms related to lenders’ liquidity position or default probabilities.

Keywords: repurchase agreement, systemic risk, repo market, margin, haircut.

JEL Classification: G12, G21, G23, E43, E58

Suggested Citation

Julliard, Christian and Pinter, Gabor and Todorov, Karamfil and Yuan, Kathy Zhichao, What Drives Repo Haircuts? Evidence from the UK Market (January 30, 2019). Available at SSRN: https://ssrn.com/abstract=3374969 or http://dx.doi.org/10.2139/ssrn.3374969

Christian Julliard

London School of Economics & Political Science (LSE) - Department of Finance ( email )

United Kingdom

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Gabor Pinter

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

Karamfil Todorov (Contact Author)

Bank for International Settlements ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

Kathy Zhichao Yuan

London School of Economics & Political Science (LSE) - Department of Finance ( email )

Old Building
Houghton Street
London, London WC2A 2AE
United Kingdom
+44 (0)20 7955 6407 (Phone)
+44 (0)20 7849 4647 (Fax)

HOME PAGE: http://fmg.lse.ac.uk/~kathy

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