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Let me rephrase...

Suppose that the repo haircut is x. Then, in order to cover 100 worth of deposits you have to repo 100/(1-x) worth of eligible assets.

In my example x is 5% so I made a mistake of about 0.25%...

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Tue May 10th, 2011 at 04:23:36 PM EST
[ Parent ]
I recall a "Repo 105" post from a couple of years ago that explained the process WRT Lehman Bros. That might have been the source of adding the "haircut" onto the principle rather than subtracting it from the "high power money" the central bank provides back to the client bank in return for what is "repoed".

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed May 11th, 2011 at 09:38:32 AM EST
[ Parent ]
From the point of view of the borrower, the haircut is added to the amount you have to borrow, as I did. Though, properly, it's not 1+x but 1/(1-x) as Jake pointed out.

From the point of view of the lender, obviously, the haircut is a discount on the value of the collateral.

I want to borrow 100, I need to pledge 105 worth of assets.

I am receiving an asset worth 100 as collateral, I will offer a loan of 95.

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Wed May 11th, 2011 at 09:48:56 AM EST
[ Parent ]
Should have said "source of the convention describing the process by" adding the haircut to the amount "repoed".

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed May 11th, 2011 at 10:07:58 AM EST
[ Parent ]
In my example x is 5% so I made a mistake of about 0.25%...

Yes, but just moments prior I was talking about 28 % haircuts, and then it's no longer a wholly trivial matter...

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu May 12th, 2011 at 11:20:19 AM EST
[ Parent ]
Right, then the difference between 1/(1-x) and 1+x is a whole 10%.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Thu May 12th, 2011 at 11:30:24 AM EST
[ Parent ]

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