The European Central Bank published a Macroprudential Bulletin focus piece assessing whether the Financial Stability Board’s proposed minimum haircut framework for certain non-centrally cleared securities financing transactions would curb leverage among euro area non-bank financial intermediation entities. Using repo haircuts to estimate “leverage on repo”, the analysis finds that minimum haircut floors would reduce the leverage non-banks can obtain via repos. Using securities financing transaction data for 14 June 2023, the paper models two scenarios: non-banks keep cash borrowing constant (and raise more capital to support it) or keep capital constant (and reduce cash borrowing). Across the non-bank subsample, applying the minimum haircuts reduces leverage on repo from 73.03 to 63.36 (around 13%). The impact is strongest for the largest borrowers: entities accounting for 50% of non-bank borrowing show a 42% reduction in leverage, with smaller declines for the 75th percentile (29%) and 90th percentile (19%), consistent with larger entities starting with higher leverage and lower average haircuts in in-scope transactions.
European Central Bank 2025-01-01
European Central Bank research suggests Financial Stability Board minimum repo haircut floors would cut euro area non-bank repo leverage by around 13%
The European Central Bank's Macroprudential Bulletin evaluates the Financial Stability Board's proposed minimum haircut framework for non-centrally cleared securities financing transactions, finding it would reduce leverage among euro area non-bank financial intermediaries. The analysis shows a 13% reduction in leverage on repo, with the largest borrowers experiencing a 42% decrease. The impact varies, with smaller declines for entities at the 75th and 90th percentiles.