Stop believing in haircuts - at least the way you think about them

Jasper Knyphausen, Benoît Nguyen and Benedikt Ballensiefen

No 3301, Working Paper Series from European Central Bank

Abstract: We study how frictions impact haircut setting in repo markets. Using transaction-level supervisory data and exploiting the 2021 introduction of the binding leverage ratio requirement, we show that three frictions jointly shape haircuts in the bilateral dealer-to-client segment: dealer balance sheet constraints, collateral convenience yields, and client outside options. In collateral-driven repos, binding leverage constraints and broader client outside options both raise haircuts, while higher convenience yields push them down. In funding-driven trades, the leverage constraint has no effect, higher convenience yields raise haircuts through the rehypothecation channel, and broader client outside options lower them. We rationalise these patterns in a bilateral bargaining model with periodic haircut renegotiation. Consistent with the model, constrained dealers exhibit higher repo-rate volatility and weaker pass-through of ECB policy rate changes in the collateral-driven segment. Post-crisis bank regulation thus carries potential unintended consequences for repo market functioning and the transmission of monetary policy. JEL Classification: C78, E43, E52, E58, G12, G21, G28

Keywords: bilateral repo; client outside options; convenience yield; dealer balance sheet; haircuts; leverage ratio; monetary policy pass-through (search for similar items in EconPapers)
Date: 2026-10
New Economics Papers: this item is included in nep-cba
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20263301

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