What drives repo haircuts? Evidence from the UK market

Using a unique transaction-level dataset covering the UK bilateral repomarket, we show that only 61% of the repos are backed by high-quality collateral, with banks intermediating liquidity across counterparties and using CCPs mainly for high-quality collateral and netting benefits. Haircuts reflect both collateral and borrower characteristics: larger, higher-rated, less levered, less sophisticated borrowers, and thosewith repeated relationships receive lower or even zero haircuts. Borrower attributes explain as much variation in haircuts as collateral quality, while lender liquidity and default risk play little role. We also document a pecking order in collateral use, with higher-quality assets pledged first.