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šŸ¦ Correspondent BankĀ 

🏦 Correspondent Bank 

Definition

A Correspondent Bank is a financial institution that provides services on behalf of another bank, typically in a different country or region. This arrangement allows banks to conduct business and process transactions in locations where they do not maintain a physical presence.

Correspondent banks act as intermediaries, enabling the smooth execution of international payments, trade finance, and foreign exchange transactions between domestic and overseas institutions.

How It Works

When two banks form a correspondent relationship, the correspondent bank holds an account for the respondent bank (often called a nostro or vostro account) and facilitates transactions such as:

  • Clearing & Settlement of cross-border payments

  • Currency Exchange in various denominations

  • Documentary Collection and trade finance processing

  • Check Clearing and fund transfers

Example:
If Bank A in Country X needs to transfer funds to Bank B in Country Y, but does not have a direct presence in Country Y, it can use a correspondent bank located in Country Y to execute the payment.

Key Functions & Services

  • Payment Processing: Executing international wire transfers via SWIFT or other networks

  • Foreign Exchange (FX): Converting one currency to another for settlement

  • Trade Finance Support: Issuing and confirming letters of credit

  • Liquidity Management: Holding balances in foreign currency accounts

  • Regulatory Compliance Assistance: Ensuring cross-border transactions meet AML/KYC requirements

Benefits

  • Enables global reach without establishing branches abroad

  • Provides access to specialized currency markets

  • Reduces operational costs for smaller banks

  • Improves transaction speed and efficiency in cross-border banking

Risks & Considerations

  • Regulatory Scrutiny: Increased AML, KYC, and sanctions screening requirements

  • Correspondent Relationship Termination: “De-risking” trends may lead to a sudden loss of services

  • Operational Risk: Dependence on another institution’s processes and systems

Related Terms

  • Nostro Account: An account a bank holds in a foreign currency in another bank

  • Vostro Account: An account a foreign bank holds in local currency with a domestic bank

  • SWIFT Network: A secure messaging system for international banking transactions

References

  • Bank for International Settlements (BIS) – Correspondent Banking

  • Financial Action Task Force (FATF) – Guidance on Correspondent Banking Services

  • SWIFT – International Payment Standards

🎥 Video Resource:


Click to watch a short educational video on how correspondent banking works.

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