ECB paper: repo haircuts are bargained, not risk-managed; leverage ratio blunts pass-through

Serguey Asael Shinder16 October 2026, 14:322 min read

Textbook finance treats the haircut in a repurchase agreement as a safety margin. A new ECB Working Paper (No 3301, October 2026) by Benedikt Ballensiefen, Jasper Knyphausen and Benoît Nguyen, titled "Stop believing in haircuts – at least the way you think about them", argues that in the euro area's bilateral market it is mostly something else: the outcome of a negotiation shaped by regulation, collateral scarcity and the client's alternatives. The views are the authors', not necessarily the ECB's.

The puzzle. In a repo, cash is borrowed against securities, most often government bonds. When a dealer lends cash, the haircut should be positive, protecting it against selling collateral at a loss if the client defaults; when it lends a security, the haircut should be negative, protecting it against buying the security back at a higher price. In practice, the authors write, bilateral haircuts are mostly zero and often carry the opposite sign. They cite evidence of the same pattern in Europe, the United States and the United Kingdom, and note that it has revived the debate about non-bank leverage, including a Financial Stability Board proposal for minimum haircut floors.

The data and the test. The paper uses transaction-level supervisory data on euro-area dealer-to-client repos from 2019 to 2024, and exploits the moment in June 2021 when the Basel III leverage ratio became binding.

Three frictions. First, dealer balance-sheet constraints: because the leverage ratio makes it costly to take in cash in collateral-driven trades, dealers closer to their regulatory minimum set higher haircuts in those trades. The effect appears once the ratio binds, lasts through the quarter rather than only around reporting dates, and is absent in funding-driven trades. Second, the convenience yield of the collateral: scarce, highly valued government bonds lower haircuts in collateral-driven trades but raise them in funding-driven trades, where dealers can re-use the bonds they receive. Third, client outside options: clients with more dealer relationships get better terms.

A bargaining model. The authors show that a dealer-client bargaining model with periodic renegotiation recovers textbook risk-management haircuts when the frictions are absent, and produces zero and opposite-sign haircuts as equilibrium outcomes once regulation, scarcity and bargaining power are added.

Why central banks should care. Consistent with the model, leverage-constrained dealers show more volatile repo rates and pass changes in the ECB's deposit facility rate through to clients less completely in collateral-driven trades. The authors conclude that post-crisis bank regulation can have unintended consequences not only for repo contract terms but for how monetary policy is transmitted through the largest segment of the money market. For the haircut-floor debate, the implication of their argument is that a haircut observed at zero is not, on its own, evidence that risk is being ignored.

Source: ECB Working Paper No 3301 — https://www.ecb.europa.eu//pub/pdf/scpwps/ecb.wp3301~1585c96063.en.pdf