Herstatt 1974
Bankhaus Herstatt failed in 1974 between the two legs of FX settlement, creating Herstatt risk — the reason we have CLS and why FX is a payments-system problem.
Definition
Herstatt was closed by German regulators after the European session but before New York dollars were paid on trades that had already delivered DEM. Counterparties were long the sold currency and short the bought. Cross-border settlement risk got a name.
Why it matters
Any market with non-PVP settlement has a Herstatt hole. Crypto and some EM onshore FX still do.
Case
The failure was small as a bank and large as a design flaw. BIS work on PVP and the later CLS Bank are the institutional response.
How to read it
Ask when each leg settles and who is the principal. If the answer is ‘end of day in two cities,’ you have Herstatt risk.
Key papers
Landmark references with real publisher or arXiv links — not token-overlap noise.
- Settlement Risk in Foreign Exchange TransactionsBIS · 1996 · CPSS / BISThe official anatomy of Herstatt risk.