Herstatt Bank

Settlement risk is sometimes called herstatt risk named after the well known failure of the german bank herstatt.

Herstatt bank. Herstatt of cologne has dealt another blow at confidence in the monetary world and has caused a general. In june of 1974 a small german bank herstatt bank failed. A new source of systemic risk. While the bank itself was not large its failure became synonymous with fx settlement risk and its lessons served as the impetus for work over the subsequent three decades to implement real time settlement systems now used the world over.

The bank was insolvent and it left the dollars that it owed on its foreign exchange deals. It went bankrupt on 26 june 1974 in a famous incident illustrating settlement risk in international finance. On june 26 1974 the bank had taken in its foreign currency receipts in europe. A little more on what is herstatt risk the name is derived from the german herstatt bank which shuttered in 1974 for insolvency.

With its international supervisory and regulatory implications the failure of bankhaus herstatt is one of the landmarks of post war financial history. Milan italy june 28 the failure of west germany s biggest private bank bankhaus i. One form of settlement risk is foreign exchange settlement risk or cross currency settlement risk sometimes called herstatt risk after the german bank that made a famous example of the risk. Herstatt k g a a was a privately owned bank in the german city of cologne.

That failure caused a string of cascading defaults in a rapid sequence totaling a loss of 620 million to the international banking sector. Herstatt was a small german bank that was involved in many foreign exchange transactions when it failed. Herstatt bank bankhaus i d. Settlement risk in large value payment systems credit systemic risk has come to be known as herstatt risk international settlements.