Correspondent Bank

Loading the player...

What is a 'Correspondent Bank'

A correspondent bank is a financial institution that provides services on behalf of another, equal or unequal, financial institution. It can facilitate wire transfers, conduct business transactions, accept deposits and gather documents on behalf of another financial institution. Correspondent banks are most likely to be used by domestic banks to service transactions that either originate or are completed in foreign countries, acting as a domestic bank's agent abroad.

BREAKING DOWN 'Correspondent Bank'

Generally speaking, the reasons domestic banks employ correspondent banks include limited access to foreign financial markets and the inability to service client accounts without opening branches abroad. Correspondent banks can act as intermediaries between banks in different countries or as an agent to process local transactions for clients when they are traveling abroad. At the local level, correspondent banks can accept deposits, process documentation and serve as transfer agents for funds. The capability to execute these services relieves domestic banks of the need to establish a physical presence in foreign countries.

Nostro and Vostro Accounts

The accounts held between correspondent banks and the banks to which they are providing services are referred to as nostro and vostro accounts. An account held by one bank for another is referred to by the holding bank as a nostro account. The same account is referred as a vostro account by the counterparty bank. Generally speaking, both banks in a correspondent relationship hold accounts for one another for the purpose of tracking debits and credits between the parties.

Transferring Money Using a Correspondent Bank

International wire transfers often occur between banks that do not have an established financial relationship. When agreements are not in place between the bank sending a wire and the one receiving it, a correspondent bank must act as an intermediary. For example, a bank in San Francisco that has received instructions to wire funds to a bank in Japan cannot wire funds directly without a working relationship with the receiving bank.

Most international wire transfers are executed through the Society for Worldwide Interbank Financial Telecommunication (SWIFT) network. Knowing there is not a working relationship with the destination bank, the originating bank can search the SWIFT network for a correspondent bank that has arrangements with both banks.

Upon finding a correspondent bank having arrangements with both sides of the transfer, the originating bank sends the transferred funds to its nostro account held at the correspondent bank. The correspondent bank deducts its transfer fee, usually $25 to $75, and transfers the funds to the receiving bank in Japan. In transactions such as this, the correspondent bank adds value in two ways. It alleviates the need for the domestic bank to establish a physical presence abroad and saves the work of setting up direct arrangements with other financial institutions around the world.

RELATED TERMS
  1. Vostro Account

    The account that a correspondent bank, usually located in the ...
  2. Interbank Deposits

    Any deposit that is held by one bank for another bank. In most ...
  3. Nostro Account

    A bank account held in a foreign country by a domestic bank, ...
  4. Wire Transfer

    An electronic transfer of funds across a network administered ...
  5. Bank

    A financial institution licensed as a receiver of deposits. There ...
  6. Business Banking

    A company's financial dealings with an institution that provides ...
Related Articles
  1. Investing

    What's a Correspondent Bank?

    A correspondent bank is a bank that acts on behalf of another bank, usually a foreign bank.
  2. Markets

    What Is The Difference Between A Nostro And A Vostro Account?

    Nostro and vostro are Italian terms that describe the same bank account. They’re used when one bank has another bank’s money on deposit.
  3. Managing Wealth

    Retail Banking Vs. Corporate Banking

    Retail banking is the visible face of banking to the general public. Corporate banking, also known as business banking, refers to the aspect of banking that deals with corporate customers.
  4. Personal Finance

    Best Ways to Send Large Sums of Money Abroad

    Understand why it may be difficult to send large sums of money internationally. Learn about the top five ways to send large sums of money abroad.
  5. Markets

    What is a Nostro Account?

    A nostro account is a bank account held in a foreign country by a domestic bank, denominated in the currency of that country.
  6. Investing

    The Pros And Cons Of Internet Banks

    Learn how internet banking services stack up against those of their brick-and-mortar peers.
  7. Investing

    What is a Bank?

    A bank is a financial institution licensed to receive deposits or issue new securities to the public.
  8. Markets

    What Do the Federal Reserve Banks Do?

    These 12 regional banks are involved with four general tasks: formulate monetary policy, supervise financial institutions, facilitate government policy and provide payment services.
  9. Personal Finance

    How Americans Can Open a Bank Account In Thailand

    Have your paperwork in order and be sure to shop around.
  10. Markets

    Why Banks Don't Need Your Money to Make Loans

    Contrary to the story told in most economics textbooks, banks don't need your money to make loans, but they do want it to make those loans more profitable.
RELATED FAQS
  1. What role does a correspondent bank play in an international transaction?

    Understand what a correspondent bank is and how it operates to facilitate currency exchange and financial transactions between ... Read Answer >>
  2. What is the difference between a correspondent bank and intermediary bank?

    Read about the differences between intermediary banks and correspondent banks, why their role is necessary, and where the ... Read Answer >>
  3. What accounting and regulatory standards is a correspondent bank subject to?

    Read about the regulations imposed on correspondent banks in the United States from the Anti-Money Laundering Act and Regulation ... Read Answer >>
  4. What is the difference between a Nostro and a Vostro account?

    Understand the terms nostro account and vostro account, and learn how they are used for accounting purposes in international ... Read Answer >>
  5. What is the difference between a Nostro account and a regular bank account?

    Read about the differences between a nostro bank account, vostro bank account and the standard commonly used demand deposit ... Read Answer >>
  6. Where did the term 'Nostro' account come from?

    Discover where the term "nostro account" came from and how, since its Renaissance foundation, its meaning has evolved to ... Read Answer >>
Hot Definitions
  1. GBP

    The abbreviation for the British pound sterling, the official currency of the United Kingdom, the British Overseas Territories ...
  2. Diversification

    A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique ...
  3. European Union - EU

    A group of European countries that participates in the world economy as one economic unit and operates under one official ...
  4. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  5. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
  6. Brexit

    The Brexit, an abbreviation of "British exit" that mirrors the term Grexit, refers to the possibility of Britain's withdrawal ...
Trading Center