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Finance
Haircut
The reduction in value applied to an asset when it is used as collateral for a loan.
Haircuts are common in repo markets, margin lending, and central bank facilities. The size of the haircut depends on how risky or volatile the asset is. Bigger haircuts mean less borrowing power.
It's like a barber trimming your hair — the bank only accepts 70% of the asset's value as security, just to be safe.
Real world: You want to borrow £80,000 using shares worth £100,000 as collateral. The bank applies a 20% haircut, so it only lends against £80,000 of value. This protects the bank if the shares fall in price.
💡 A haircut protects the lender — but it reduces how much money you can borrow against your assets.