Herstatt Bank - Brief History of the Bank

absdBank Herstatt

Brief history of the bank

In June 1956 Iwan David Herstatt started Herstatt bank with the combine efforts of his friend Hans Gerling.Herstatt Bank was the thirty fifth largest bank of Germany.The bank had an asset of 2.07 DM at the end of 1973.

Danny Dattel was heading the head of the foreign exchange department .His contact was very little with the other divisions.

After lapse of the coupling of the European currencies to the US Dollar speculations with foreign exchange developed as the principal item of the banking transaction.

Background of the collapse

* In 1974 the Herstatt Bank of Germany failed due to some reasons .Herstatt Bank faced huge crisis in foreign exchange liquidity.

* Considering the volatility of the markets is very important factor. Because of these time differences the Herststt Bank was not able to clear its all transactions at one time.Thus; Herstatt Bank could clear only those foreign exchange trades which were in one jurisdiction but not in another.

* It caused several more bank failures. Whom Herstatt bank owed delivery of foreign currencies

* Another major reason of the collapse was the huge foreign exchange exposure of the Herstatt bank, because it was eighty times more than its estimated exposure limit.

* The Herstatt Bank also chooses the wrong strategy. A speculation in the movement of dollar is the most important reason for such a huge liability.

* The foreign exchange risk was thus three times as large as the amount of its capital.

Impacts of crisis

Federal Banking Supervisory Office conducted an audit that prompted the management of the bank to close its open foreign exchange positions

* Herstatt Bank faced DM 470 million losses on its foreign exchange operation in June 1974.

* Herstatt's license has withdrawn by the BAK red on 26 June 1974 to conduct banking activities.

* The assets of the Herstatt bank were 1 billion. It also became clear that they were more than counterbalance by its DM 2.2 billion liabilities.

Reasons of crisis

Market Trend

* After closure of the fixed exchange rate speculation became a common trend in the foreign exchange transactions of the banks in Europe.

High Risk High Return

* There was more chances of gain and loss because the Herstatt 'business was of high