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A discount applied to an asset's market value when calculating how much it can support as collateral.
If the agreed haircut is h, the simplified recognised collateral value is market value multiplied by one minus h. Haircuts can differ by asset, maturity, liquidity and counterparty. If financing is adjusted as collateral changes, the borrower may need additional cash or securities. Those calls can constrain a leveraged investor even when the lender's quoted interest rate has not changed.
Take €1 million of securities with a 5% haircut. They support €950,000 in this simplified financing. Increasing the haircut to 10% reduces that amount to €900,000, requiring €50,000 more from the borrower to maintain the position. The asset itself has not necessarily fallen in price; the lender has changed the buffer it requires against potential future loss.
ECB survey finds easier wholesale credit terms, with financing costs mixed