was a privately owned bank in the German
city of Cologne
. It went bankrupt
on 26 June 1974 in a famous incident illustrating settlement risk
in international finance.
On June 26, 1974, German regulators forced the troubled Bank Herstatt into liquidation. That day, a number of banks had released payment of DEM
to Herstatt in Frankfurt in exchange for USD that was to be delivered in New York. Because of time-zone differences, Herstatt ceased operations between the times of the respective payments. The counterparty banks did not receive their USD payments.
Responding 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) and Luxembourg 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 Bank Herstatt was one factor that led to the creation of the continuous linked settlement
platform (CLS), which launched almost 30 years later in 2002. This payment versus payment (PVP) process enables member... Read More