Haircut

A percentage cut applied to a value, and the word is used in two main ways. A lender or a clearing house applies one to collateral, lending less than its market value so that a fall in price does not leave the loan uncovered. A creditor takes one when a resolution or a restructuring pays back less than the amount owed.

A broker accepting ₹100 crore of pledged shares at a 50% haircut lends ₹50 crore against them, and the share price has to fall by more than half before the loan is uncovered. In an insolvency resolution where admitted claims of ₹1,000 crore receive ₹320 crore, the creditors' haircut is 68%.

These two meanings connect. How far and how fast the asset's value can fall sets the collateral haircut, and the creditor haircut is what happens when it fell further.

Ask what the haircut assumes about the worst day.