Word: herstatt
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More Failures. So far this year, New York's Franklin National Bank has reported losses of $83 million, resulting largely from currency trading. In Germany, the big Bankhaus I.D. Herstatt dropped so much cash that it went under; it was followed in quick succession by four smaller banks. Even the staid Union Bank of Switzerland has reportedly had to cover shortages of $50 million lost playing currency roulette...
...gotten burned speculating in foreign currencies, the losses have been much worse in Europe. In the U.S., Franklin National Bank lost $63.6 million in the first five months of this year, largely because of currency trading; in Germany, Westdeutsche Landesbank Girozentrale dropped more than $100 million, and Bankhaus I.D. Herstatt lost so much that it folded in late June (TIME, July 8). U.S. banking authorities expect no more Franklin National cases, but European financiers are nervously awaiting more collapses of the Herstatt type...
...bail out private banks caught in a liquidity squeeze just as the U.S. Federal Reserve has kept Franklin National in business by lending it more than $1 billion. However, they specifically ruled out aid for banks caught in "irresponsible" foreign exchange dealings. The decision was no comfort to Herstatt depositors and creditors, who still stand to lose up to a staggering $1.4 billion, but it might help to calm the Continent's financial markets...
Those markets could stand some calming. In recent weeks foreign-currency trading in the huge Frankfurt center has slowed to a crawl, a situation that could eventually impede world trade. Currency dealers are afraid to accept orders forwarded by banks for fear that they might be dealing with another Herstatt. When Herstatt was ordered to close by the West German government, it left currency transactions with a number of other banks uncompleted. For example, Seattle-First National Bank sold $22.5 million worth of marks to Herstatt for dollars; it delivered the marks just before the collapse and is still waiting...
...Herstatt scandal also exposed a dubious aspect of the German banking system, one of the least regulated in Europe. In recent years, many German banks have been speculating heavily in currency, gold, real estate and commodities. For more than a year, other European bankers have been voicing worry about the size of the risks. Now, more Herstatt cases are expected...