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How did closing a German bank cause other banks to withhold payments in New York?
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On 26 June 1974, German authorities closed Bankhaus Herstatt at 3:30 pm Frankfurt time. Some trading partners had already delivered Deutsche marks but had not received the dollars owed in exchange. Herstatt’s New York correspondent—the bank handling its dollar payments—then suspended outgoing transfers from its account. Those counterparties were left , exposed to the entire value of their unfinished exchanges. The vulnerability lay in settling the currency payments independently: a bank could release its payment before receiving the other currency. Differences in payment timing created an opening for settlement failure; they do not explain why Herstatt became insolvent.
Other New York banks withheld payments pending confirmation of incoming funds, spreading disruption through a multilateral net settlement system, which offsets obligations among participating banks. The Bank for International Settlements (BIS) reported an estimated 60% fall in transfers through that system over the following three days. That was not a measurement of all American payments, let alone world trade. The striking lesson is that individually defensive decisions can a collective problem: waiting for reassurance can leave others waiting for money. Nor is incomplete protection obsolete: BIS survey results show that 54% of average daily settlement in April 2025 used methods that reduced, but did not eliminate, settlement risk.
CLS Bank began operating in September 2002 with payment-versus-payment settlement: either both currency payments settle or neither does. For transactions using that service, this eliminates the specific risk of paying without receiving—not every financial or operational risk. Yet the mechanism is not universally available. BIS research published in June 2026, examining April 2025 settlement, identified counterparty access and ineligible currency pairs or trade types as principal barriers to its use. It also documented continued use of methods that reduce settlement risk without eliminating it. Herstatt’s enduring lesson is therefore practical: agreeing a trade and safely completing its payments are different achievements.