Herstatt Risk

Herstatt risk, also known as cross-currency settlement risk or foreign exchange risk is the risk that a party to a trade fails to make payment even though it has been paid by its counterparty. It is named after the German bank Herstatt whose license was withdrawn by regulators on June 26, 1974 due to its inability to cover its liabilities. This forced the bank into liquidation and it ceased operating. Because of time zone differences this meant that Herstatt was unable to pay some New York banks for foreign exchange it had received before it ceased operating.

See also: Credit Risk, Counterparty Risk, CLS Bank