What are Correspondent Banks and How Do They Work?

Correspondent banks are banks that help other banks send and receive money in different countries. They act as a middle bank for payments, transfers, and currency exchange. They use special accounts called “nostro” (our money with you) or “vostro” (your money with us).

This helps smaller banks join the global money system without opening branches abroad. Correspondent banks make international payments easier, faster, and safer.

What is correspondent banking?

It’s not that hard to define correspondent banking - It’s when a local bank works through a foreign bank to move money. The foreign bank helps with transfers, payments, and currency exchange. This lets smaller banks join the global money system without opening offices abroad. 

Definition and meaning

Correspondent bank meaning is when one bank works through another bank in a different country. It helps local banks send and receive money abroad. The correspondent bank does transfers, payments, and currency exchange. For example, a bank in Brazil may use a U.S. bank to pay suppliers in dollars. This makes moving money between countries easier and faster.

What does “correspondent” mean in banking?

In banking, “correspondent” means a bank that helps another bank work in a foreign country. It acts as a middle bank to send money, make payments, or exchange currency. Smaller banks use correspondent banks to connect to the global money system.

Role in international finance

Correspondent banking plays an important role in international finance. It helps banks send money abroad without opening branches in other countries. The correspondent bank acts as a middle bank, making transfers, currency exchanges, and payments. This facilitates global trade and enables efficient cross-border payments.

Correspondent Bank Accounts

Correspondent bank accounts are special accounts one bank holds with another bank in a different country. They can be called “nostro” (our funds with you) or “vostro” (your funds with us). These accounts let banks send money, exchange currencies, and settle deals abroad. The correspondent bank handles the transfer and charges a fee for the service.

What is a correspondent account?

A bank correspondent account is a special account one bank keeps with another bank in a different country. The account can be called “nostro” (our money with you) or “vostro” (your money with us). When a bank sends money abroad, it uses this account through the correspondent bank. The correspondent then processes the payment and takes a small fee.

How correspondent accounts function

Correspondent accounts work by letting one bank keep money with another bank abroad.

They are called “nostro” (our money with you) or “vostro” (your money with us). Through these accounts, banks can send payments, change currencies, and settle trades. It also follows global rules like AML to keep transactions safe and legal.

Examples of correspondent banking relationships

For example, if Mizuho Bank in Japan holds an account in US dollars with Citibank in the USA, this is a correspondent relationship. For Mizuho it is a “nostro” account (our money with you). For Citibank it is a “vostro” account (your money with us). This setup lets the Japanese bank make dollar payments abroad. It shows how banks connect to move money across countries.

Correspondent Banks vs. Intermediary Banks

Correspondent and intermediary banks are both middle banks that help send money abroad. A correspondent bank works with many currencies and offers services like transfers or exchanges. An intermediary bank is usually used for one currency when two banks are not directly connected. Correspondent banks make global trade easier but can be slower and cost more. Intermediary banks give a link for payments but with fewer services.

Key differences explained

Correspondent and intermediary banks are both middle banks that help move money between countries. A correspondent bank usually works with many currencies and handles services like transfers, deposits, and currency exchange. An intermediary bank is often used for a single currency when two banks have no direct link. In some regions, the two terms mean the same thing. 

When each is used in cross-border payments

Correspondent and intermediary banks are both middle banks used for cross-border payments. A correspondent bank is often used when a transfer needs more than one currency, like dollars to euros. An intermediary bank is used when the payment is in just one currency, often linking two banks without a direct tie.

Benefits and challenges

Correspondent banking has both benefits and challenges. The benefits are easier cross-border payments, access to many currencies, and support for global trade. It lets smaller banks connect to the worldwide system without opening offices abroad. The challenges include higher costs, long transfer times, and complex rules like AML. Banks must also rely on trusted partners, which introduces certain risks.

Correspondent Banking in Practice

List of US correspondent banks (overview)

US correspondent banks are big banks that help move money in US dollars for other banks worldwide. They hold accounts, process transfers, and exchange currencies. Top ones on the list of US correspondent banks include JPMorgan Chase, Citibank, Bank of New York Mellon, Standard Chartered, and Wells Fargo. They act as partners for smaller or foreign banks that need USD services.

How banks choose correspondent partners

Banks choose correspondent partners by looking at their strength, trust, and global reach. They check if the bank can handle payments, currency exchange, and trade services well.

Costs also matter, since big banks offer many services but may charge more. Some banks avoid risky areas like crypto or cannabis, so partners must fit their needs. A good correspondent partner is stable, reliable, and helps connect to world markets.

Risks and compliance requirements

Correspondent banking is useful but also risky. Banks must follow rules to stop crime and money laundering. They check clients (KYC), watch payments, and review partner banks.

Workers are trained on new laws, and systems are kept secure. Good control helps protect money and keep trust.

FAQ on Correspondent Banking

What is the definition of correspondent banking?

The definition of correspondent banking: when one bank helps another bank work in foreign markets. It keeps special accounts called “nostro”  and “vostro”. Through these accounts, banks can send payments, trade, and exchange currencies. The correspondent bank acts like a bridge between local and global systems. This makes it easier for banks to move money across countries.

What is a correspondent account?

A correspondent account is a special account one bank keeps with another bank in another country. It can be called “nostro” (our money with you) or “vostro” (your money with us).

These accounts let banks send money, exchange currencies, and settle payments abroad.

The correspondent bank processes the transfer and charges a small fee. This system connects local banks to global banking networks.

How do correspondent banks differ from intermediary banks?

Correspondent bank vs intermediary bank can be confusing because both help move money between countries. A correspondent bank usually works with many currencies and offers services like payments or currency exchange. An intermediary bank mainly passes money along in a transfer when two banks don’t have a direct link. The difference between correspondent bank and intermediary bank is mostly in their role and currency use.

Why are correspondent banks important for global trade?

Correspondent banks are important for global trade because they let local banks send and receive money abroad. They handle payments, currency exchange, and trade documents between countries. For example, when a buyer pays a supplier overseas, the correspondent bank makes the transfer. This system allows businesses to trade without opening banks in every country.

Do all banks need correspondent accounts?

Not all banks need correspondent accounts. They are mainly useful for banks that make many international payments. Big companies paying suppliers in other countries benefit most from them. These accounts help banks handle payments more easily and see costs clearly. Smaller banks or local banks with few foreign transactions may not need them.