Bank of England: What drives repo haircuts? Evidence from the UK market

Staff Working Paper No. 985
By Christian Julliard, Gábor Pintér, Karamfil Todorov and Kathy Yuan

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.

Editor’s Note: this paper uses data from 2012, which may not be relevant to market activity in 2022.

The full paper is available at

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