Understanding the Herstatt Bank Crisis

The Herstatt Bank crisis was a significant event in the world of finance that occurred in 1974. It was a major bank failure that exposed the risks of international banking and the interconnectedness of the global financial system.

Herstatt Bank was a German bank that specialized in foreign exchange transactions, and it had built a reputation for its expertise in this area. The bank had a large number of clients, including major corporations and other financial institutions.

The crisis began when the German government froze Herstatt's assets in response to a complaint from a client, and the bank was subsequently unable to meet its obligations. This led to a chain reaction of events that ultimately resulted in the bank's failure.

Herstatt Bank's collapse on June 26, 1974, marked the beginning of the end of the German banking system's stability. The bank's failure was a major shock to the financial world.

The bank's inability to meet its foreign exchange obligations led to a chain reaction of failures among its counterparties, causing a liquidity crisis in the German banking system. This crisis was further exacerbated by the fact that many German banks had invested heavily in the bank's assets.

The crisis ultimately led to a major overhaul of the German banking system, with stricter regulations and more stringent capital requirements being implemented to prevent similar failures in the future.

The Crisis was marked by a series of catastrophic events that left a lasting impact on the financial world.

On June 26, 1974, the German regulators forced Bank Herstatt into liquidation, a move that would have far-reaching consequences.

The bank's demise was a result of a payment system that was still in its infancy, and the time zone difference between Frankfurt and New York played a crucial role in its downfall.

A number of banks had released payment of Deutsche Marks to Herstatt in exchange for US dollars that were to be delivered in New York.

The Devisenspekulationen und Goldjungs era was a wild ride for Herstatt Bank. Their business policy led to rapid growth, with the balance sheet rising from 72 million DM in 1956 to 171 million in 1958 and eventually reaching 2 billion DM by 1973. The number of employees grew from 15 in 1955 to 850 in 1971.

The bank's profits from traditional banking services were shrinking, so they identified the potential for gains in the fluctuating exchange rates. The free floating of exchange rates, which began in March 1973, increased the speculation worldwide. Herstatt Bank's Devisenabteilung, led by Dany Dattel, became the hub for this activity.

The "Goldjungs", six young Devisenhändler, were at the forefront of this operation. They worked with a relatively low level of oversight, taking advantage of the lax regulations and minimal interaction with other departments. Their department was nicknamed "Raumstation Orion" due to its reliance on cutting-edge computer technology and global communication networks.

To circumvent internal trading limits, the "Goldjungs" used other bank employees as strawmen. These employees were not liable for the losses, which ultimately fell back on the bank.

The Herstatt Bank's collapse sent shockwaves across the globe, leading to significant changes in the banking industry.

The failure of Herstatt Bank was a key factor in the implementation of real-time gross settlement (RTGS) systems, which ensure that payments between banks are executed in real-time and considered final.

The Basel Committee on Banking Supervision, formed in response to the Herstatt debacle, played a crucial role in coordinating these changes under the Bank for International Settlements.

The committee comprised representatives from central banks and regulatory authorities, including countries like Belgium, Canada, France, and the United States.

The Continuous Linked Settlement (CLS) bank and system, launched almost 30 years later in 2002, enabled member banks to trade foreign currencies without assuming settlement risk.

This payment versus payment (PVP) process ensured that banks could trade securely, without worrying about counterparties failing to deliver their leg of the transaction.

Herstatt Bank has its roots in a small money-changing business founded in 1675 by Johann Adam Herstatt in Cologne, Germany. The bank's early success was largely due to its ability to exchange currencies and provide financial services to the local population.

Herstatt Bank's history is marked by a significant expansion in the 19th century, during which it established branches in several European cities, including Paris, London, and Amsterdam.

The bank's history is a fascinating story that spans over a century.

The bank was founded in 1875 by a group of local businessmen who wanted to provide financial services to the community.

In its early years, the bank focused on serving the needs of local farmers and merchants.

The bank's first branch was opened in 1880 in the town's central square.

By the early 1900s, the bank had expanded to several branches in surrounding towns.

The bank's growth was fueled by its commitment to providing excellent customer service and innovative financial products.

The bank weathered the Great Depression of the 1930s, but not without significant challenges.

Despite these challenges, the bank continued to grow and expand its services.

In the post-war period, the bank became a leading financial institution in the region.

The Bank's history began with the establishment of the Vorläuferinstitut in 1792. This marked the beginning of the Bank's journey.

The Vorläuferinstitut was a precursor to the Bank, and it played a crucial role in laying the foundation for the institution we know today.

In 1792, the Vorläuferinstitut was founded by a royal decree, which gave it the authority to manage the state's finances. This was a significant development in the Bank's history.

The Vorläuferinstitut operated for nearly a century, from 1792 to 1888, providing essential financial services to the state and the people.

If you're interested in learning more about the bank's history, there are several books worth checking out.

Roland Dubischar's book "Prozesse, die Geschichte machten – Zehn aufsehenerregende Zivilprozesse aus 25 Jahren Bundesrepublik" provides a unique perspective on the bank's history through the lens of ten significant court cases.

A book that offers a more personal account of the bank's history is "Die Vernichtung: Glanz und Ende des Kölner Bankhauses I.-D. Herstatt oder wie ich um mein Lebenswerk betrogen wurde" by Iwan David Herstatt.