What Drives Repo Haircuts? Evidence from the UK Market

58 Pages Posted: 22 Jul 2022

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 of England

Karamfil Todorov

Bank for International Settlements

Kathy Yuan

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

Date Written: June 10, 2022

Abstract

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

Julliard, Christian and Pinter, Gabor and Todorov, Karamfil and Yuan, Kathy Zhichao, What Drives Repo Haircuts? Evidence from the UK Market (June 10, 2022). Bank of England Working Paper No. 985, Available at SSRN: https://ssrn.com/abstract=4168862 or http://dx.doi.org/10.2139/ssrn.4168862

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 (Contact Author)

Bank of England ( email )

Karamfil Todorov

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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