As I write this post, I'm sitting in a coffee shop waiting to speak to a group of senior bankers at Ulster Bank about what we can learn from the history of financial crises. The four lessons I will be sharing with them are: (1) the 2008 crisis is totally different from anything that has come before in terms of its scale and scope; (2) if bankers aren't properly incentivised, they will take on too much risk; (3) asset markets can reverse, but this is only a concern if the assets are financed via debt; and (4) politics matters - crises ultimately have a political root.
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