When the New York Fed writes "there might be a role for regulation of haircuts," they aren't talking about the situation on the top of your head. Instead, analysts at the bank are zeroing in on the amount of collateral that might be needed in a given repo market trade. Haircut requirements shot up during the financial crisis between bilateral repo trades, but they were more stable in the tri-party market, except when true panic set in. "If cash investors actively manage haircuts, as we've seen in the bilateral repo market, then there's a potential role for haircuts as an equilibrating mechanism to lower the probability of runs," the bank says in a posting on its Web site.
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