Herstatt Bank (Bankhaus I.D. Herstatt K.G.a.A.) was a privately owned bank in the German city of Cologne. It went bankrupt on 26 June 1974, an event widely referred to as the Herstatt crisis. Herstatt's failure specifically highlighted the importance of settlement risk in foreign-exchange markets, which became correspondingly known as Herstatt risk.
The Herstatt crisis had important policy consequences. In the subsequent months of 1974, Germany established the Liquiditäts-Konsortialbank [de] and, at the international level, central bankers created the Basel Committee on Banking Supervision.[1] With considerably more delay, concerns about Herstatt risk were revived in the late 1980s and 1990s and resulted in the creation of CLS Bank, operational since 2002 as a global foreign exchange market settlement utility.
Herstatt Bank was founded in 1955 by Ivan David Herstatt, with financial assistance from Herbert Quandt, Emil Bührle and Hans Gerling, the head of an insurance company who took a majority share.[2] By 1974 the bank had assets of over DM2 billion, making it the 35th largest bank in Germany. Herstatt Bank became a significant participant in the foreign exchange markets. During 1973 and 1974, the U.S. dollar experienced significant volatility. The bank made wrong bets on the direction of the dollar, and by June 1974 had accumulated DM470 million in losses, compared with capital of only DM44 million.
Crisis and liquidation
On 26 June 1974, German regulators forced the troubled Bank Herstatt into liquidation. That day, a number of banks had released payment of Deutsche Marks (DEM) to Herstatt in Frankfurt in exchange for US dollars (USD) that were to be delivered in New York. The bank was closed at 16:30 German time, which was 10:30 New York time. Because of time zone differences, Herstatt ceased operations between the times of the respective payments. The counterparty banks did not receive their USD payments.
The Continuous Linked Settlement (CLS) bank and system was launched almost 30 years later in 2002. This payment versus payment (PVP) process enables member banks to trade foreign currencies without assuming the settlement risk associated with the process, whereby a counterparty could fail before delivering their leg of the transaction.
^. Risk Encyclopedia. Archived from the original on 2007-11-09.
^Harald Wixforth, Bielefeld / Bremen. "Upheavals, Continuities and Structural Change at Financial Center Cologne after WWII" (PDF). IBF Frankfurt. IBF Paper Series. p. 14. Retrieved 12 December 2017.
Schenk, Catherine R. Summer in The City: The 1974 international banking crisis in London and its implications for regulatory reform. 2011.
January 31, 2023
herstatt, bank, bankhaus, herstatt, privately, owned, bank, german, city, cologne, went, bankrupt, june, 1974, event, widely, referred, herstatt, crisis, herstatt, failure, specifically, highlighted, importance, settlement, risk, foreign, exchange, markets, wh. Herstatt Bank Bankhaus I D Herstatt K G a A was a privately owned bank in the German city of Cologne It went bankrupt on 26 June 1974 an event widely referred to as the Herstatt crisis Herstatt s failure specifically highlighted the importance of settlement risk in foreign exchange markets which became correspondingly known as Herstatt risk Herstatt BankTypePrivateIndustryBankingHeadquartersCologne GermanyArea servedWorldwideProductsConsumer bankingFormer offices of Herstatt Bank Cologne The Herstatt crisis had important policy consequences In the subsequent months of 1974 Germany established the Liquiditats Konsortialbank de and at the international level central bankers created the Basel Committee on Banking Supervision 1 With considerably more delay concerns about Herstatt risk were revived in the late 1980s and 1990s and resulted in the creation of CLS Bank operational since 2002 as a global foreign exchange market settlement utility Contents 1 Background 2 Crisis and liquidation 3 Aftermath and policy legacy 4 See also 5 ReferencesBackground EditHerstatt Bank was founded in 1955 by Ivan David Herstatt with financial assistance from Herbert Quandt Emil Buhrle and Hans Gerling the head of an insurance company who took a majority share 2 By 1974 the bank had assets of over DM2 billion making it the 35th largest bank in Germany Herstatt Bank became a significant participant in the foreign exchange markets During 1973 and 1974 the U S dollar experienced significant volatility The bank made wrong bets on the direction of the dollar and by June 1974 had accumulated DM470 million in losses compared with capital of only DM44 million Crisis and liquidation EditOn 26 June 1974 German regulators forced the troubled Bank Herstatt into liquidation That day a number of banks had released payment of Deutsche Marks DEM to Herstatt in Frankfurt in exchange for US dollars USD that were to be delivered in New York The bank was closed at 16 30 German time which was 10 30 New York time Because of time zone differences Herstatt ceased operations between the times of the respective payments The counterparty banks did not receive their USD payments Aftermath and policy legacy EditResponding to the cross jurisdictional implications of the Herstatt debacle the G 10 countries the G 10 is actually eleven countries Belgium Canada France Germany Italy Japan the Netherlands Sweden Switzerland the United Kingdom and the United States Luxembourg and Spain formed a standing committee under the auspices of the Bank for International Settlements BIS Called the Basel Committee on Banking Supervision the committee comprises representatives from central banks and regulatory authorities This type of settlement risk in which one party in a foreign exchange trade pays out the currency it sold but does not receive the currency it bought is sometimes called Herstatt risk The failure of Herstatt Bank was a key factor that led to the worldwide implementation of real time gross settlement RTGS systems which ensure that payments between one bank and another are executed in real time and are considered final The work on these issues was coordinated by the Basel Committee on Banking Supervision under the Bank for International Settlements The Continuous Linked Settlement CLS bank and system was launched almost 30 years later in 2002 This payment versus payment PVP process enables member banks to trade foreign currencies without assuming the settlement risk associated with the process whereby a counterparty could fail before delivering their leg of the transaction See also EditLong Term Capital Management Bankruptcy of Lehman BrothersReferences Edit Basel Committee on Banking Supervision Risk Encyclopedia Archived from the original on 2007 11 09 Harald Wixforth Bielefeld Bremen Upheavals Continuities and Structural Change at Financial Center Cologne after WWII PDF IBF Frankfurt IBF Paper Series p 14 Retrieved 12 December 2017 Schenk Catherine R Summer in The City The 1974 international banking crisis in London and its implications for regulatory reform 2011 Retrieved from https en wikipedia org w index php title Herstatt Bank amp oldid 1104101286, wikipedia, wiki, book, books, library,
