Leverage constraints raise repo haircuts and weaken pass-through
Repo haircuts reflect regulation and bargaining, not just risk protection. European Central Bank (ECB) Working Paper 3301, published October 15, 2026, by Benedikt Ballensiefen, Jasper Knyphausen and Benoît Nguyen documents weaker policy-rate transmission at constrained dealers.
Three frictions overturn textbook protection
The sample covers 1,803,869 collateral-driven and 1,359,609 funding-driven bilateral repo trades from January 2019 to June 2024, involving 17 and 16 dealers respectively.
After the 3 percent leverage requirement became binding on June 28, 2021, the most constrained dealers raised collateral-driven haircuts by about 31 basis points relative to the least constrained; the middle group raised them by about 21. The effect persists throughout the quarter and is absent in funding-driven trades.
Higher collateral convenience yields lower collateral-driven haircuts but raise funding-driven haircuts through collateral reuse.
Broader client dealer networks raise collateral-driven haircuts and lower funding-driven haircuts, conserving clients' cash and collateral respectively.
Contract rigidity reaches policy transmission
A bilateral bargaining model with periodically reset haircut schedules explains zero and opposite-sign haircuts as equilibrium outcomes.
Constrained dealers show a 4.6 basis-point increase in collateral-driven repo-rate volatility after the regulatory change.
Across eleven ECB deposit rate decisions from July 2022 to June 2024—ten increases and one cut—a one-standard-deviation higher dealer leverage ratio corresponds to a 7.4 basis-point stronger relative rate adjustment in collateral-driven trades.
Funding-driven pass-through shows no comparable leverage effect.
Haircuts are not risk gauges
The authors find that haircut levels alone do not isolate risk protection.
Trade initiation is assumed rather than observed, and funding-driven volatility also rises weakly at constrained dealers, limiting the placebo result.
These are the authors' findings, not the views of the ECB, the Eurosystem or the Banque de France.