Basics of Correspondent Banks

 

Correspondent Banking

Correspondent Banks

A correspondent bank is a financial institute in a country that is authorized to provide services for another bank or financial institution in a foreign country. The services provided by a correspondent bank are currency exchange, handling business transactions and trade documentation, and money transfers. Correspondent accounts are created through bilateral agreements between the two banks.

  • ‘Correspondent banks’ are used by domestic banks to service transactions originating in foreign countries and act as a domestic bank’s agent abroad. One reason this is done is that the domestic bank may have limited access to foreign financial markets, and cannot service its client accounts without opening up a branch in another country. These services may include cash/funds management, international wire transfers, drawing arrangements for demand drafts and mail transfers, payable-through-accounts, cheques clearing, etc.
  • ‘Correspondent accounts’ are the accounts of foreign banks that require the ability to pay and receive the domestic currency. The accounts allow them to pay others from the account or receive money from others into the account. This allows the bank to offer various services to their customers involving such as foreign exchange and foreign currency-denominated loans and deposits, despite them not having a bank license for the foreign country in that country’s currency.

Such accounts are necessary for international trade which demands people and businesses pay for things in a currency other than their own.

It is impractical to transport large amounts of currency around the world and physically exchange one’s own currency for the currency that the customer/supplier demands. Instead, money is taken out of your account at the local bank in the local currency and an equivalent amount of money is put in the client’s account at the local bank in the foreign currency.

 

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