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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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    References listed on IDEAS

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    1. Andreas Schrimpf & Hyun Song Shin & Vladyslav Sushko, 2020. "Leverage and margin spirals in fixed income markets during the Covid-19 crisis," BIS Bulletins 2, Bank for International Settlements.
    2. Claudio Bassi & Michael Grill & Felix Hermes & Harun Mirza & Charles O’Donnell & Michael Wedow, 2025. "Enhancing Repo Market Transparency: The EU Securities Financing Transactions Regulation," Journal of Financial Regulation, Oxford University Press, vol. 11(1), pages 98-118.
    3. Markus K. Brunnermeier & Lasse Heje Pedersen, 2009. "Market Liquidity and Funding Liquidity," The Review of Financial Studies, Society for Financial Studies, vol. 22(6), pages 2201-2238, June.
    4. Ayelen Banegas & Phillip J. Monin, 2023. "Hedge Fund Treasury Exposures, Repo, and Margining," FEDS Notes 2023-09-08-3, Board of Governors of the Federal Reserve System (U.S.).
    5. Adam Copeland & Antoine Martin & Michael Walker, 2014. "Repo Runs: Evidence from the Tri-Party Repo Market," Journal of Finance, American Finance Association, vol. 69(6), pages 2343-2380, December.
    6. Gorton, Gary & Metrick, Andrew, 2012. "Securitized banking and the run on repo," Journal of Financial Economics, Elsevier, vol. 104(3), pages 425-451.
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    Cited by:

    1. Bouveret, Antoine & Darpeix, Pierre-Emmanuel & Ferrari, Massimo & Grill, Michael & Molestina Vivar, Luis & Okseniuk, Dorota & Raillon, Franck & Schäfer, Annegret & Schmidt, Daniel Jonas & Weistroffer,, 2025. "Containing risks posed by leverage in alternative investment funds," ESRB Occasional Paper Series 28, European Systemic Risk Board.

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    Keywords

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    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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