Correspondent Banking
Correspondent banking is an arrangement in which one bank holds deposits for another bank and makes and receives payments on its behalf, normally so the second bank can reach a currency or a market where it has no branch or license of its own.
Also called: correspondent bank · correspondent account · correspondent relationship
A bank rarely has branches everywhere its customers send money. Instead it opens an account with a bank that does have a presence in the destination market and instructs that bank to pay out on its behalf. The account it holds there is a nostro account; the same account on the other bank’s books is a vostro.
Correspondent banking is what carries most cross-border payments. Instructions travel over messaging networks such as SWIFT, while the money itself moves as debits and credits across these bank-to-bank accounts. Each link in the chain is a relationship that has to be applied for, underwritten and maintained, which is why losing a single one can strand an entire corridor.
In practice
A correspondent relationship exists between two banks. A non-bank cannot hold a correspondent account in its own right, however often an MSB or a fintech is described as having one. What a non-bank can get is an account at a bank, or sponsored access through one.
Example
A bank in Kenya has no US presence, but its customers need to pay US suppliers in dollars. It opens a US dollar account with a bank in New York. When a Kenyan customer pays a US supplier, the Kenyan bank instructs the New York bank to debit that account and credit the supplier’s bank. The Kenyan bank calls the account a nostro; the New York bank calls the same account a vostro.
Commonly confused with
| Term | How it differs |
|---|---|
| Sponsor Bank | A correspondent bank serves another bank; a sponsor bank gives a non-bank access to rails under the sponsor’s own charter and permissions. |
| Nostro Account | Correspondent banking is the relationship between the two banks; a nostro account is one of the specific accounts held inside it. |
See also
- Nostro AccountA nostro account is an account a bank holds in a foreign currency at a bank in that currency’s home market, literally “our account with you.” It is how a bank keeps a working balance in a currency it cannot hold at its own central bank.
- Vostro AccountA vostro account is the account a foreign bank holds with a domestic bank in the domestic currency, or “your account with us.” It is the same account a nostro describes, seen from the books of the bank that holds it.
- Sponsor BankA sponsor bank is a regulated bank that lets a non-bank reach accounts, payment rails or card networks under the bank’s own charter and permissions. The program runs on the bank’s authority, and the bank stays answerable for what happens on it.
- De-riskingDe-risking is a bank exiting a whole category of customer, such as money services businesses, crypto firms or particular corridors, rather than assessing and pricing each relationship on its own facts. Accounts close because of what the customer is, not what the customer did.
- Cross-Border PaymentA cross-border payment is one where the payer and the payee are in different jurisdictions. It usually involves a currency conversion and at least one intermediary, and it answers to the rules at both ends rather than only the sender’s.