A. A haircut is a percentage that is subtracted from the PAR value of the assets that are being used as collateral B. The size of the haircut depends on the riskiness of the security offered as collateral C. Deduction from Capital D. Deduction from risk weight E. A & B above
It hasn’t been so long ago that banks were in trouble. I believe it was around 2008. Also don’t forget about the Great Depression and the run on banks back then. No one wants to ever see that happen again. That’s why there have been what is called the Basel Accords. It’s where the Basel Committee on Banking Supervision began.
Now there has been a Basel II and even a Besel III conference. The aim is to ensure that there is enough money so that no bank will have problems. The banks must have sufficient money to handle any situation. There is a term in Basel II called haircuts. A haircut is actually a percentage. It is subtracted from the par value of the assets used as collateral. The size of the haircut will depend on how risky the security offered as collateral actually is.