Herstatt risk: 1974 and ???..... Or, why banks could disappear

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Moreover, because banks are closely intertwined financially with each other through lending to and borrowing from each other, holding deposit balances with each other, and the payments clearing system, a failure of any one bank is believed to be more likely to spill over to other banks and to do so more quickly. Default by one bank on an obligation to another bank may adversely affect that bank's ability to meet its obligations to other banks and so on down the chain of banks and beyond. These cascading failures if unstopped put the current global economic system at risk (p. 29).

> > Y2K related financial gridlock due to > > Herstatt risk could be on the order of trillions of dollars involving multiple large or small institutional bank failures, due to liquidity problems and or one of the 5 risks mentioned.> > > > Even assuming a low probability for these scenarios, the situation needs to be considered in a co-ordinated manner. The potential for a situation similar to Bankhaus Herstatt in 1974 could pose the most significant risk to the international monetary system seen to date. Unfortunately, neither the BIS, IMF, Global 2000 working group, nor The Worldbank has a fully co-ordinated crisis response plan for such situations (p. 30).

-- Jim (waiting@aol.com), October 18, 1999


Considering the fact that Americans are not known for their savings I don't think there's a whole lot to worry about So CA. Personal bankruptcies have become so high legislation keeps being tossed around to "punish the people." Everyone I've spoken to is hoping for something like the Herstatt to happen and bring about conditions in which their credit card and small loan debts are destroyed. They haven't any money in the bank and lack cash to speak of due to their debts. There's no worry whatsoever about "losing ones money."

-- Paula (chowbabe@pacbell.net), October 18, 1999.

But if all money is created from debt, and then "money" is "lost" somehow, then does our economy spiral down the drain?

-- Jim (waiting@aol.com), October 19, 1999.

>> But if all money is created from debt, and then "money" is "lost" somehow, then does our economy spiral down the drain? <<

When debts are defaulted, the lender loses money. That is obvious. In the case of banks, loans appear on the books as assets. When bank loans turn sour, the banks must move what was once an asset over into a loss. This results in the loss of money. That is obvious.

When banks begin to lose money, due to the inability of their lendees to repay loans, banks turn cautious. If enough debtors default, banks become strapped and begin to fail. Surviving banks become even more cautious.

Like it or not, credit is the lubricant that greases the economy. If banks cut back drastically on credit, the economy stops growing. If enough of a credit crunch develops, and enough loans turn sour, the economy begins to shrink. As the economy shrinks, people lose their jobs, or get cut back on their hours. The process can snowball.

Eventually, the bad debts get burned out of the system. What controls the length of the process is how long it takes before banks can get their balance sheets back into the black. If a long period of optimism precedes the downturn, the number of questionable loans is very high. The process of bad debt liquidation can get up a pretty large head of steam. Even strong businesses can find that they had booked too many sales to weak customers.

We are coming out of a period of excessively optimistic loaning practises. It may get rather bad before it gets better.

-- Brian McLaughlin (brianm@ims.com), October 19, 1999.

Brian, well said.

The International Monitoring testimony to Congress suggested that foreign exchange trading would be halted prior to Dec 31 because it is in excess of USD 1 trillion per day and no participant could afford any delay or disruption in settlement.

So, if foreign exchange trading stops, even for a short period, what would be the ramiifcations?

I suspect a drop in world trade and a slow down in post Y2K remediation by the "fix on failure" crowd. This slow down in international would likely affect domestic lending and credit worthiness assessements. So if the "fix on failure" firm needs a loan to fix their failure, they could be SOL.

This finacial disruption appears to be a strategy by the big players whether Y2K + BITR or Y2K = TEOTWAWKI as it is a premeptive move prior to actual Y2K rollover.

This appears to be as critical as the actual Y2K software/hardware glitches.

-- Bill P (porterwn@one.net), October 19, 1999.

* * * 19991019 Tuesday

Historical anecdote:

In 1832, President Andrew Jackson vetoed the US Congress-passed re- charter of The Second Bank of the United States. The Congress failed to override the veto, ergo, all banking ceased to operate under official government sanction/protection until 1913 creation of the Federal Reserve.

Economies have thrived without banks--contrary to what present-day statist-banksters would like folks to think and/or believe--via bartering.

Simple and viable.

Regards, Bob Mangus

* * *

-- Robert Mangus (rmangus@hotmail.com), October 19, 1999.

Monday October 18, 2:34 pm Eastern Time

Company Press Release

SOURCE: Foreign Exchange Committee

Foreign Exchange Committee Issues Y2K Guidelines

NEW YORK, Oct. 18 /PRNewswire/ -- The Foreign Exchange Committee, joined by a number of international financial industry associations and committees in Australia, Canada, England, Japan, Singapore and the United States, today issued guidelines designed to minimize confusion associated with any foreign exchange contracts (including options and swaps) that fail to settle as a result of Y2K-related events that affect clearing banks or central banks.

The recommended guidelines, known as ``Y2K: Best Practice in the Foreign Exchange Market,'' include background information, the terms of the Best Practice, general notes and a statement as to how the Best Practice is to be used.

In general, the Best Practice recommends a short waiting period after a Y2K event occurs that affects a clearing bank or a central bank.

If the Y2K event is not remedied within the specified waiting period, the Best Practice states that some or all affected transactions may be liquidated at then current market prices.

Parties are, of course, free to mutually agree to take actions other than as specified in the Best Practice.

The guidelines do not apply to a failure to settle as a result of a Y2K problem within the systems of a party to a contract, which would be covered by the non-payment provision of the applicable contract.

Parties to transactions will retain the rights and remedies provided in their contractual arrangements.

In particular, the Best Practice would not change credit provisions and defaults unrelated to Y2K events.

The guidelines reflect commercially reasonable standards for market participants and provide guidance to regulators and tribunals who may be asked to consider the actions of participants in the foreign exchange market in the event of problems resulting from the millennium date change.

It is anticipated that foreign exchange market participants both inside and outside of the U.S. will use the guidelines.

The guidelines were prepared by a joint Working Group of the Financial Markets Lawyers Group and the Foreign Exchange Committee's Operations Managers Working Group.

The Foreign Exchange Committee is sponsored by, but independent of, the Federal Reserve Bank of New York.

A copy of the Best Practice is available at the Foreign Exchange Committee's website at http://www.ny.frb.org/fxc.

The Australian Financial Markets Association, The British Bankers' Association, the Canadian Foreign Exchange Committee, the Emerging Markets Traders Association, the International Swaps and Derivatives Association, Inc., and the Singapore Foreign Exchange Market Committee have joined in the issuance of this Best Practice. The Tokyo Foreign Exchange Market Committee has endorsed this Best Practice, which is currently being considered by trade associations in other countries.

SOURCE: Foreign Exchange Committee


-- (m@rket.trends), October 19, 1999.

market trends:

I wonder whatthe waiting period is.

Simple math: USD 1 trillion at 6% annual percentage rate is cistting/producing someone about USD 6.8 million per hour.

At that rate maybe Brinks could lease a few Concordes and run the Forex manually.

-- Bill P (porterwn@one.net), October 19, 1999.

costing not cistting - sorry poor typing skills.

-- Bill P (porterwn@one.net), October 19, 1999.

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