Polls / November 25, 2010

Do you know what a "haircut" is in financial markets?

The financial markets term “haircut” is not well known among respondents to an eZonomics online poll, with just 20% saying they know what it means.

A “haircut” takes a little – or a lot – off the top  
Not surprisingly, a haircut in financial markets is different to what can be expected from visiting a barber or hairdresser. In financial markets, haircuts are painful rather than pleasant. But like a visit to the regular hairdresser, they can leave a hole in finances. And the more severe the cut, the longer it takes for the cut to grow out and be forgotten.

There are two styles of financial market haircut
In financial markets, haircut is mainly used in two ways. The first refers to the difference between the buying and the selling price of a share, bond or other financial instrument. The difference is often a handling fee for the transaction. The second is about a cut in the value of financial assets used to support a loan.

If, for example, a company or institution struggles to repay a loan, the providers of the loan may agree to “take a haircut” by reducing the amount they are repaid (rather than risking not being repaid at all). In this case, haircuts are meant to provide a one-off adjustment to allow both the lender and the borrower to move on after a period of financial pain. The Financial Dictionary also has a definition.

Haircuts in the news – not the fashion pages
Haircuts have often been in the news, when for example countries in Europe face financial difficulties. At the time of writing, the Irish Independent wrote how bond holders at one financial institution accepted a haircut of about 80% of the value of their loans.

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eZonomics team
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