The bond-buying proposal announced by the ECB this week has been well received by financial markets. Under the plan, the ECB will buy unlimited amounts of European sovereign bonds. To keep Germany happy, the bond purchases will be sterilized by offering banks low-interest term deposits of about one week. However, the bond purchase scheme is conditional on countries introducing severe austerity measures. Matthew Yglesias in an article in Slate has labelled this power grab by the ECB immoral, and he argues that Spain, Italy, and Portugal should exit the euro.
As an undergraduate, I was taught about the failure of Herstatt Bank in 1974 and Herstatt risk. This bank was only the 35th largest bank in Germany at the time so why would anyone be interested in studying its failure? Herstatt failed because of its involvement in risky foreign exchange business. When it closed its doors on 26 June 1974, counterparty banks (mainly in New York) had not received dollars due to them because of time-zone differences - this is known as settlement risk. The cross-jurisdictional implications of its failure resulted in the Bank for International Settlements setting up the Basel Committee on Banking Supervision and Herstatt's failure was a key reason for the establishment of real-time gross settlements systems, which ensures that payments between two banks are executed in real time. The Bank of England's Ben Norman has an interesting post on Herstatt over at the Bank's new blog ( Bank Underground ). As well as giving an excellent overview of