Explanation

In a classic repurchase agreement (repo):

• Bank A (repo seller) borrows cash by selling securities with an agreement to repurchase them later
• Counterparty B (repo buyer) lends cash by purchasing securities with an agreement to sell them back later

Regarding the statement about haircuts:

• A haircut is the percentage difference between the market value of the collateral and the amount of cash lent
• A higher haircut means the lender provides less cash relative to the collateral's value
• This increases the lender's protection because if the borrower defaults, the lender can sell the collateral and is more likely to recover the full loan amount
• Therefore, a higher haircut does reduce counterparty risk for the lender

Since the question asks "except which is false" and the statement about haircuts is actually true, this appears to be the correct answer. The statement is presented as something that should be false, but it's actually a true characteristic of repo transactions.

Key takeaway: Higher haircuts provide greater protection to lenders in repo transactions by creating a larger buffer between the collateral value and the loan amount.