What You Lend Against
How Much Do You Have to Hand Over?
The price falls and the haircut widens at the same moment. Both multiply, and that is how funding disappears.
11 min135 XP available4 challenges
A bank holds a portfolio it can pledge. In calm conditions the lender takes a small haircut and hands over almost the full value. In a stress two things happen at once and they are not independent: the collateral is marked down, and the lender widens the haircut because it has become less sure of the mark. Push both and watch how little is left — this is the arithmetic behind every funding crisis in this course.
Cash it can raise
€9.5B
value × (1 − fall) × (1 − haircut)
- What it could raise before the mark-down
- €9.5B
value × (1 − haircut)
Long bonds lost double digits through 2022
A few per cent on government bonds; far more on anything complicated
Compare no mark-down with a severe one, and cut the portfolio’s funding capacity below €5bn
- Try 0% — done
- Try 40% — not yet
- Compare no mark-down with a severe one, and cut the portfolio’s funding capacity below €5bn — not yet
Answer to continue.