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Repo haircuts: Market practices and the impact of minimum requirements on leverage

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  • Grill, Michael
  • Hermes, Felix
  • Wedow, Michael

Abstract

We use transaction-level data on the euro area repo market to assess the calibration of the Financial Stability Board's (FSB) recommended minimum haircut framework and its impact on leverage in non-bank financial institutions. We find that market haircuts are currently not in line with the framework. Therefore, a market failure exists that needs to be addressed by regulation, such as the minimum haircut framework. In assessing its potential impact, we find that it would affect larger and more leveraged entities the most, indicating its capability to make a meaningful contribution to addressing risks from leverage in non-bank financial institutions.

Suggested Citation

  • Grill, Michael & Hermes, Felix & Wedow, Michael, 2025. "Repo haircuts: Market practices and the impact of minimum requirements on leverage," Finance Research Letters, Elsevier, vol. 71(C).
    • Handle: RePEc:eee:finlet:v:71:y:2025:i:c:s1544612324015137
    DOI: 10.1016/j.frl.2024.106484
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    More about this item

    Keywords

    Repo; Financial regulation; Haircuts; Financial stability;
    All these keywords.

    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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