Staff Working Paper No. 985
By Christian Julliard, Gábor Pintér, Karamfil Todorov, Jean‑Charles Wijnandts and Kathy Yuan
Using a 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 clearing counterparties to reallocate high‑quality collaterals 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 higher quality one 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 significant roles in the data for lenders’ liquidity position or default probabilities.
This version was updated in January 2025.
What drives repo haircuts? Evidence from the UK market