hi guys, they sound the same to me and yet in the risk management section, credit risk falls under a financial risk and herstatt is a non-financial risk; can anybody add some clarity?
herstatt risk is settlement risk: settlement won’t happen in time due to different time zones, etc
Janet your close though…I think of herstatt risk as a unique form of credit risk.
Herstatt risk is when the settlement timing of contracts differs due to time zones, and a counter-party defaults on their obligation at the same time that you are paying them your side of the obligation. _________________________________________________________ Herstatt Bank 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 banks to trade foreign currencies without assuming the settlement risk associated with the process, whereby a counterparty could fail before delivering their leg of the transaction.
yes herstatt risk is basically a mixture of the first posts. it’s represented by credit risk created by differences in time in settlement.