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In finance, a haircut is the difference between the current market value of an asset and the value ascribed to that asset for purposes of calculating regulatory capital or loan collateral. The amount of the haircut reflects the perceived risk of the asset falling in value in an immediate cash sale or liquidation. The larger the risk or volatility of the asset price, the larger the haircut.
For example, United States Treasury bills, which are relatively safe and highly liquid assets, have little or no haircut, whereas more volatile or less marketable assets might have haircuts as high as 50%.
Lower haircuts allow for more leverage. Haircut plays an important role in many kinds of trades, such as repurchase agreements (referred to in debt-instrument finance as "repo" but not to be confused with the concept of repossession denoted by that term in consumer finance) and reverse repurchase agreements ("reverse repo" in debt-instrument finance).
In mass media,[1][2][3] as well as in economics texts,[4][5] especially after the financial crisis of 2007–2008,[6] the term "haircut" has been used mostly to denote a reduction of the amount that will be repaid to creditors,[3] or, in other words, a reduction in the face value of a troubled borrower's debts,[2][note 1] as in "to take a haircut": to accept or receive less than is owed.[7] In 2012, world media was reporting on the "biggest debt-restructuring deal in history",[8]: 1 which included the "very large haircut" of some "70 percent of par value" of Greek state bonds, in NPV terms.[8]: 27
- ^ Safire, William (6 January 2009). "Haircut". The New York Times. Retrieved 3 July 2018.
- ^ a b "All Greek to you? Greece's debt jargon explained". BBC. 10 July 2015. Retrieved 3 July 2018.
- ^ a b Clinch, Mark (19 August 2015). "Why the IMF is wrong on a Greek debt haircut". CNBC. Retrieved 3 July 2018.
- ^ Brigham, Eugene F.; Houston, Joel F. (2011). Fundamentals of Financial Management. Cengage Learning. ISBN 978-0538477116.
- ^ Blundell-Wignall, Adrian; Slovik, Patrick (February 2011). "A Market Perspective on the European Sovereign Debt and Banking Crisis" (PDF). Financial Market Trends. 2010 (2). OECD: 87–108.
- ^ "Ukraine creditors' debt plan shows bond haircut inevitable". Reuters. 29 May 2015. Retrieved 3 July 2018.
- ^ "What is a Haircut (in finance)?". Corporate Finance Institute. Retrieved 3 July 2018.
- ^ a b Liu, Yan; Bergthaler, Wolfgang; Giddings, Andrew; Kosonen, Amanda; Papaioannou, Michael; Grigorian, David; Guscina, Anastasia; Presciuttini, Gabriel; Tsuda, Takahiro; Baqir, Reza (26 April 2013). "Sovereign Debt Restructuring: Recent Developments and Implications" (PDF). Policy Papers. IMF. Retrieved 30 June 2018.
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