// definition
Collateral haircut
Valuation haircut on a pledged asset
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Short definition
A reduction applied to the value of a pledged asset to protect the lender against losses when realising collateral. At an unchanged valuation, a higher haircut reduces coverage, requiring more collateral to secure the same borrowing. It is distinct from the interest rate charged on funding and from an accounting loss on the asset.
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Knowledge map
Intuition
A haircut leaves a buffer for the lender to realise collateral after a default.
Formula
post-haircut value = pre-haircut value × (1 - h), with h expressed as a fraction; excluding further markdownsRelated analyses
Primary sources
- ECB, What are haircuts?Definition, calculation and lender protection.
- Guideline ECB/2026/27Article 1 and annex: schedules to be applied from 30 November 2026. Further valuation adjustments may apply.