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What drives repo haircuts? Evidence from the UK market

Christian Julliard (), Gabor Pinter, Karamfil Todorov and Kathy Yuan ()
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Christian Julliard: London School of Economics
Kathy Yuan: London School of Economics

No 985, Bank of England working papers from Bank of England

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.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 (search for similar items in EconPapers)
JEL-codes: E44 G14 G23 (search for similar items in EconPapers)
Pages: 56 pages
Date: 2022-06-10
New Economics Papers: this item is included in nep-mon
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