Template-Type: ReDIF-Paper 1.0
Author-Name: Christian Julliard
Author-X-Name-First: Christian
Author-X-Name-Last: Julliard
Author-Name: Gabor Pinter
Author-X-Name-First: Gabor
Author-X-Name-Last: Pinter
Author-Name: Karamfil Todorov
Author-X-Name-First: Karamfil
Author-X-Name-Last: Todorov
Author-Name: Jean-Charles Wijnandts
Author-X-Name-First: Jean-Charles
Author-X-Name-Last: Wijnandts
Author-Name: Kathy Yuan
Author-X-Name-First: Kathy
Author-X-Name-Last: Yuan
Title: What drives repo haircuts? Evidence from the UK market
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.
Length: 58 pages
Creation-Date: 2022-07
File-URL: https://www.bis.org/publ/work1027.pdf
File-Format: Application/pdf
File-Function: Full PDF document
File-URL: https://www.bis.org/publ/work1027.htm
File-Format: text/html
Number: 1027
Keywords: repurchase agreement, systemic risk, repo market, margin, haircut
Classification-JEL: G12, G21, G23, E43, E58
Handle: RePEc:bis:biswps:1027