In general, haircut involves a reduction in the level of a “monetary” amount that would otherwise be available for a specific purpose. In a given context, it might be defined as the margin or deposit that is tied up to cover a position taken by a financial intermediary such as a broker. In a different context, a haircut (repo margin/ repo discount) is the collateral posted by the borrower and held by the lender, in a repo transaction, in order to guarantee contractual fulfillment.

In a regulatory context, a haircut (regulatory haircut) constitutes the amount of capital provision made by a bank or financial institution when booking a particular transaction in order to get a recognition of 100% of regulatory capital. This effectively implies that it has taken a “capital haircut“, that is it would have less capital available to absorb or cover losses associated with other business on its books.

A regulatory haircut (regulatory capital haircut) is simply 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.