Haircut

A haircut is a reduction in the value of an asset. When central banks lend to banks against eligible collateral, for example, they will do so after applying a haircut to the value of the collateral to be sure that the sale of the collateral at the reduced value will cover repayment of the loan if the bank is unable to repay. Haircuts vary in size depending on how risk, liquid and volatile the collateral is.

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