What Is the Impact of Regulatory Frameworks like Basel III on Collateral Haircuts?

Basel III and subsequent regulatory reforms imposed stricter requirements on banks and financial institutions regarding the quality and haircuts of collateral. They favor highly liquid, low-risk assets (e.g. sovereign debt) and mandate conservative, standardized haircuts for other asset classes.

This has generally increased the cost of funding for derivatives by demanding higher-quality, less-risky collateral.