Haircut

The haircut is the reduction in the value or collateral of an asset used as security for a loan or other financial transaction. When banks and other financial institutions conduct a haircut, a risk management measure is taken to account for potential asset value fluctuations. Applying haircuts depends on the type and perceived risk of the asset. More stable assets and liquid may have lower haircuts, while riskier and more volatile assets may require higher haircuts. The bank’s risk management policies, regulatory requirements, and market conditions determine the specific haircut percentages.