A correspondent account is an account (often called a
nostro or vostro account) established by a
banking institution to receive deposits from, make payments on behalf of, or handle other
financial transaction
A financial transaction is an agreement, or communication, between a buyer and seller to exchange goods, services, or assets for payment. Any transaction involves a change in the status of the finances of two or more businesses or individuals. ...
s for another financial institution. Correspondent accounts are established through bilateral agreements between the two banks.
Application
Commonly, correspondent accounts are the accounts of foreign
bank
A bank is a financial institution that accepts deposits from the public and creates a demand deposit while simultaneously making loans. Lending activities can be directly performed by the bank or indirectly through capital markets.
Becau ...
s that require the ability to pay and receive the domestic
currency
A currency, "in circulation", from la, currens, -entis, literally meaning "running" or "traversing" is a standardization of money in any form, in use or circulation as a medium of exchange, for example banknotes and coins.
A more general ...
. A bank will typically require correspondent accounts for holding currencies outside of jurisdictions where it has a branch or affiliate. This is because most
central bank settlement systems do not register deposits or transfer funds to banks not doing business in their countries. With few exceptions, the actual funds held in any foreign currency account (whether for a bank or for its customer) are held in the bank's correspondent account in that currency's home country.
Even where a bank has branches or affiliates in multiple jurisdictions, balances in a foreign currency account in one jurisdiction are held with a correspondent account at either that bank's branch or affiliate in the foreign country, or at another institution. For example,
HSBC
HSBC Holdings plc is a British multinational universal bank and financial services holding company. It is the largest bank in Europe by total assets ahead of BNP Paribas, with US$2.953 trillion as of December 2021. In 2021, HSBC had $10.8 tri ...
receives
US dollars
The United States dollar (symbol: $; code: USD; also abbreviated US$ or U.S. Dollar, to distinguish it from other dollar-denominated currencies; referred to as the dollar, U.S. dollar, American dollar, or colloquially buck) is the official ...
at its affiliate,
HSBC Bank USA, while
DBS Bank
DBS Bank Limited, often known as DBS, is a Singaporean multinational banking and financial services corporation headquartered at the Marina Bay Financial Centre in the Marina Bay district of Singapore. The bank was previously known as The De ...
Singapore receives US dollars at
JPMorgan Chase
JPMorgan Chase & Co. is an American multinational investment bank and financial services holding company headquartered in New York City and incorporated in Delaware. As of 2022, JPMorgan Chase is the largest bank in the United States, the w ...
.
Example
A Dutch oil company is a customer of
ING in Amsterdam, and sells a cargo of 500,000
barrels
A barrel or cask is a hollow cylindrical container with a bulging center, longer than it is wide. They are traditionally made of wooden staves and bound by wooden or metal hoops. The word vat is often used for large containers for liquids, u ...
of oil for $40 million to a Swiss trading company who is a customer of
Credit Suisse
Credit Suisse Group AG is a global Investment banking, investment bank and financial services firm founded and based in Switzerland. Headquartered in Zürich, it maintains offices in all Financial centre, major financial centers around the w ...
. ING Amsterdam holds its dollars at
Bank of America
The Bank of America Corporation (often abbreviated BofA or BoA) is an American multinational investment bank and financial services holding company headquartered at the Bank of America Corporate Center in Charlotte, North Carolina. The bank ...
(BofA) and Credit Suisse holds its dollars at
The Bank of New York Mellon (BNY). When the Swiss trader instructs its bank to pay the money, Credit Suisse debits the trader's account and transfers dollars from its correspondent account at BNY to ING's account at BofA. Then, ING credits the dollars to the oil company's dollar account in Amsterdam.
See also
*
Hawala
*
Hundi
*
Informal value transfer system
*
Nostro and vostro accounts
References
*
Title 31 of the United States Code
Title 31 of the United States Code outlines the role of the money and finance in the United States Code
In the law of the United States, the Code of Laws of the United States of America (variously abbreviated to Code of Laws of the United St ...
- Special measures for jurisdictions, financial institutions, international transactions, or types of accounts of primary money laundering concern
*
Title III, Section 311 (e)(1)(B), United States
Patriot Act
The USA PATRIOT Act (commonly known as the Patriot Act) was a landmark Act of the United States Congress, signed into law by President George W. Bush. The formal name of the statute is the Uniting and Strengthening America by Providing Appro ...
* {{cite web , author1=European Central Bank , title=Glossary of terms related to payment, clearing and settlement systems , url=https://www.ecb.europa.eu/pub/pdf/other/glossaryrelatedtopaymentclearingandsettlementsystemsen.pdf
Banking terms