What drives repo haircuts? Evidence from the UK market

Christian Julliard, Gabor Pinter, Karamfil Todorov, Jean-Charles Wijnandts and Kathy Yuan

No 1027, BIS Working Papers from Bank for International Settlements

Abstract: Using 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 central counterparties to reallocate high-quality collateral 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 that of higher quality 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 in the data significant roles for lenders' liquidity position or default probabilities.

Keywords: repurchase agreement; systemic risk; repo market; margin; haircut (search for similar items in EconPapers)
JEL-codes: E43 E58 G12 G21 G23 (search for similar items in EconPapers)
Pages: 58 pages
Date: 2022-07
New Economics Papers: this item is included in nep-ban, nep-eec and nep-mon
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Citations: View citations in EconPapers (7)

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Working Paper: What drives repo haircuts? Evidence from the UK market (2022)
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