Contact Us

If you still have questions or prefer to get help directly from an agent, please submit a request.
We’ll get back to you as soon as possible.

Please fill out the contact form below and we will reply as soon as possible.

  • Courses
  • Home
  • Economics, Finance, & Analytics
  • Banking, Lending, and Credit Industry

Correspondent & Respondent Bank - Explained

What are Correspondent and Respondent Banks?

Written by Jason Gordon

Updated at April 18th, 2022

Contact Us

If you still have questions or prefer to get help directly from an agent, please submit a request.
We’ll get back to you as soon as possible.

Please fill out the contact form below and we will reply as soon as possible.

  • Marketing, Advertising, Sales & PR
    Principles of Marketing Sales Advertising Public Relations SEO, Social Media, Direct Marketing
  • Accounting, Taxation, and Reporting
    Managerial & Financial Accounting & Reporting Business Taxation
  • Professionalism & Career Development
  • Law, Transactions, & Risk Management
    Government, Legal System, Administrative Law, & Constitutional Law Legal Disputes - Civil & Criminal Law Agency Law HR, Employment, Labor, & Discrimination Business Entities, Corporate Governance & Ownership Business Transactions, Antitrust, & Securities Law Real Estate, Personal, & Intellectual Property Commercial Law: Contract, Payments, Security Interests, & Bankruptcy Consumer Protection Insurance & Risk Management Immigration Law Environmental Protection Law Inheritance, Estates, and Trusts
  • Business Management & Operations
    Operations, Project, & Supply Chain Management Strategy, Entrepreneurship, & Innovation Business Ethics & Social Responsibility Global Business, International Law & Relations Business Communications & Negotiation Management, Leadership, & Organizational Behavior
  • Economics, Finance, & Analytics
    Economic Analysis & Monetary Policy Research, Quantitative Analysis, & Decision Science Investments, Trading, and Financial Markets Banking, Lending, and Credit Industry Business Finance, Personal Finance, and Valuation Principles
  • Courses
+ More

Table of Contents

What is a Correspondent Bank?How Does a Correspondent Bank Work?Example of a Correspondent Bank Transaction 

What is a Correspondent Bank?

Correspondent banking is an agreement between two banks whereby one bank (correspondent bank) carries on representative services (such as maintaining deposits, offering settlements, etc.) for another bank (respondent bank).

Back to:BANKING, LENDING, & CREDIT INDUSTRY

How Does a Correspondent Bank Work?

A respondent bank may contract with a correspondent bank to carry on transactions as a representative of the respondent bank. In other scenarios, the correspondent bank will serve as an intermediary between the respondent bank and a third-party bank. The respondent bank's client will undertake a transaction at the third-party bank, such as a deposit or withdrawal. The third-party bank will seek settlement of the transaction by going through the correspondent bank. The correspondent bank will settle the transaction with the third-party bank before seeking a settlement from the respondent bank. This arrangement is popular when the respondent bank does not have operations in a given area - such as in foreign countries.

Correspondent banks are capable of processing documentations, accepting deposits, and posing as funds transfer agents at the local level. Respondent Bank accounts held at the correspondent banks are commonly referred to as a Nostro Accounts. The correspondent bank holding these accounts refer to them as Vostro accounts.

Correspondent banking is not limited to simply clearing customer transactions. Other services provided by the correspondent bank include:

  • Local Branch Services,
  • Third-party payment processing,
  • Commercial Financial Arrangments,
  • Cash clearing,
  • Liquidity controls, and
  • Short-term borrowing/lending.

Example of a Correspondent Bank Transaction 

Let's assume instructions to transfer funds to a bank located in Italy has been received by a bank located in China. The bank in China is not capable of transferring the funds directly to the bank in Italy if it doesn't have a working relationship with the bank in Italy. Since a majority of international transfers are conducted by the Society for Worldwide Interbank Financial Telecommunication (SWIFT), the bank in China can search for a correspondent bank that has a working relationship with it and the bank in Italy on the SWIFT network. It then transfers funds to its Nostro account in the correspondent bank; which in turn transfers the funds to the receiving bank in Italy after deducting a fee ranging from $25 to $75.

correspondent bank

Was this article helpful?

Yes
No

Related Articles

  • Community Reinvestment Act - Explained
  • National Credit Union Association - Explained
  • PCI Compliance - Explained
  • Compounding - Explained



©2011-2021. The Business Professor, LLC.
  • Privacy

  • Questions

Definition by Author

0
0
Expand