Correspondent Banking

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What is Correspondent banking?

Correspondent banking refers to a bank opening an account in a foreign bank to carry out operations in a local currency (dollar, yen, etc) since a currency must be held in its country of origin (excluding fiat currency). In concrete terms, this means that if a French bank wants to be able to keep its clients' dollar assets, it will have to open an account in a bank in the United States. It is estimated that nearly 70% of international payments are made through correspondent banking.

How does it work?

Correspondent banking refers to the  banking services provided by one bank (the "correspondent bank") to another bank (the "client bank"). A bank's correspondent network is made up of all the foreign banks with which it has opened one (or more) accounts to carry out foreign currency transactions. 

For example,

  • A French bank needs to make payments in yen currency for one of its clients. It will have to open an account with a Japanese bank (correspondent bank). The account opened by the French bank is a so-called "nostro" account, which will record the French bank's foreign currency holdings and ensure the proper execution of its foreign currency transactions (yen in our example). 
  • Similarly, a Japanese institution that needs to make a payment in euros will have to open an account with a European bank, of which it will become the client bank. The account opened by the Japanese correspondent is called a "vostro" account.
What services are included with Correspondent banking?

Correspondent banking includes a wide range of services. Among the main ones:

  • Cash management (for example, interest-bearing accounts in several currencies);
  • International wire transfers;
  • Check clearing.