A haircut (margin discount) that is applied to a regulatory capital. This category of capital is defined as the minimum capital a bank or any other regulated financial institution is required to maintained pursuant to relevant international accords and national regulations. A regulatory haircut implies a discount applied to an amount of capital issued in order to account for various situations where capital is impacted by a specific type of liability (such as tax liability). In other words, it is meant to adjust for the amount of potential liability at the time of issue.

For example, a regulatory haircut would require issuers to issue a greater amount of hybrid instruments (to add to tier-1 capital) in order to attain a certain level of regulatory capital. If an issuer is subject to a 30% tax rate, it needs to issue $14.9 of hybrid instruments to get recognition for $100 of regulatory capital.