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Negative Treasury Haircuts

By: Jeremy Bejarano, Lina Lu and Jonathan Wallen
  • Format:Print
  • | Language:English
  • | Pages:50
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Abstract

We study the supply of leverage in the Treasury market by large dealer banks. On average, leverage is greater than 100%. Negative haircuts are inconsistent with canonical theories of collateralized lending. For dealer banks, bundling counterparty credit risk with Treasury repo is an attractive regulatory arbitrage. We show that the balance sheet capacity of dealer banks is an important driver of their supply of leverage. Their ability to warehouse Treasuries on balance sheet enables them to avoid fire sales and lend at higher leverage. This supply of leverage is cyclical and increases the fragility of the Treasury market.

Keywords

Treasury Market; Treasury; Repo; Leverage; Intermediation; Banks

Citation

Bejarano, Jeremy, Lina Lu, and Jonathan Wallen. "Negative Treasury Haircuts." Harvard Business School Working Paper, No. 26-034, December 2025.

About The Author

Jonathan L. Wallen

Finance
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