What Drives Repo Haircuts? Evidence from the UK Market
58 Pages Posted: 22 Jul 2022
Date Written: June 10, 2022
Using a unique transaction-level data, we document that only 60% of bilateral repos held by UK banks were 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 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. 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: E44, G14, G23
Suggested Citation: Suggested Citation