Regulators should require them to do this consistently and prudently across the credit cycle. Haircuts tend to be cyclical: falling in good times, which adds to the growth of credit, and rising in busts, which contracts credit. A regulator could mitigate the cyclical behavior of haircuts and its consequences by establishing minimum haircuts that apply in both good and bad times.
Calibrating minimum haircuts to the risks and volatility expected during bad times would make lenders more secure, increasing their resilience to losses.