The Odd Behavior of Repo Haircuts during the Financial Crisis

Since the financial crisis began, there’s been substantial debate on the role of haircuts in U.S. repo markets. (The haircut is the value of the collateral in excess of the value of the cash exchanged in the repo; see our blog post for more on repo markets.) In an influential paper, Gorton and Metrick show that haircuts increased rapidly during the crisis, a phenomenon they characterize as a general “run on repo.” Consequently, some policymakers and academics have considered whether regulating haircuts might help stabilize the repo markets, for example, by setting a minimum level so that haircuts can never be too low, as discussed in another paper by Gorton and Metrick. In this post, we discuss recent findings showing that the rise in haircuts wasn’t a general phenomenon after all—haircuts didn’t rise in every repo market. We also discuss why the divergence across markets is odd, and the implications for policymakers.