“The Herstatt Bank, also known as Bankhaus I.D. Herstatt KGaA, was a privately owned bank based in Cologne, Germany. The bank was founded in 1948 and grew to become one of the largest privately owned banks in Germany, with a focus on foreign exchange trading.
In 1974, the Herstatt Bank collapsed due to a series of bad investments and fraudulent activities, which left the bank unable to meet its obligations to its creditors. The collapse of the bank was significant, as it was one of the first major international banks to fail in the post-World War II period and raised concerns about the stability of the global financial system.
The collapse of the Herstatt Bank was also notable for the way in which it was handled by regulators and central banks. The collapse occurred during a time when there was no established international framework for managing cross-border bank failures, which led to a number of difficulties in managing the fallout from the collapse.
The Herstatt Bank crisis ultimately led to the establishment of new international regulations and institutions to manage cross-border bank failures and reduce the risks posed by such events to the global financial system. The crisis also served as a wake-up call for the financial industry and regulators, highlighting the need for greater transparency, oversight, and risk management in the banking sector.”
Sourced from Chat GPT, assessed by Sean Lee.
Postscript: This was before my time in the FX market but I started my career in Düsseldorf so it was still much talked about. My recollection is that Herstatt had built a massive short USD/DMK position but the market got wind of the fact and started ramping the market massively in the other direction. The losses were so big that Herstatt basically went bust in 1 day. Those were the days when 20 big figure daily moves weren’t unusual.