What Is a Correspondent Bank?

A correspondent bank is a financial institution that provides services to

another one—usually in another country. It acts as an intermediary or agent,
facilitating wire transfers, conducting business transactions, accepting
deposits, and gathering documents on behalf of another bank.

Correspondent banks are most likely to be used by domestic banks to

execute transactions that either originate or are completed in other
countries. Domestic banks generally use correspondent banks to gain
access to foreign financial markets and to serve international clients without
having to open branches abroad.

KEY TAKEAWAYS

 A correspondent bank is an authorized financial institution that

provides services on behalf of another financial institution.
 Correspondent bank's services may include funds transfer,
settlement, check clearing, and wire transfers.
 The accounts held between correspondent banks and the banks to
which they are providing services are referred to as nostro and vostro
accounts.
 Domestic banks can serve their international clients and gain access
to foreign financial markets by using correspondent banks, rather than
setting up branches overseas.

How a Correspondent Bank Works

Correspondent banks are third-party banks. They act as middlemen
between different financial institutions. As such, they provide treasury
services between sending and receiving banks, especially those in different
countries. Services can include:

 funds transfer
 settlement
 check clearing
 wire transfers
 currency exchange

Correspondent banks may also act as agents to process

local transactions for clients when they are traveling abroad. At the local
level, correspondent banks may accept deposits, process documentation,
and serve as funds transfer agents.
The accounts held between correspondent banks and the banks for which
they provide services are referred to as nostro and vostro accounts. An
account held by one bank for another is referred to by the holding bank as
a nostro account, or our account on your books. The same account is
referred to as a vostro account—your account but on our books—by
the counterparty bank. Both banks in a correspondent relationship hold
accounts for one another for the purpose of tracking debits and credits
between the parties.

A correspondent bank must act as the middleman when sending and

receiving banks do not have agreements in place for wire transfers.

Correspondent banks are a pivotal part of the financial industry, as they

provide a way for domestic banks to operate when it isn't feasible for them
to open branches in a different location—especially in another country.

For instance, a small domestic bank with clients in different countries can
partner with a correspondent bank to meet the needs of its client
internationally. Doing so also gives it access to the foreign financial market.
The correspondent bank will, therefore, charge a fee for this service, which
is usually passed off from the domestic bank to the customer.

Special Considerations
International wire transfers often occur between banks that do not have an
established financial relationship. For example, a bank in San Francisco that
receives instructions to wire funds to a bank in Japan cannot wire funds
directly without a working relationship with the receiving bank.

Most international wire transfers are executed through the Society for
Worldwide Interbank Financial Telecommunication (SWIFT) network.
Knowing there is not a working relationship with the destination bank, the
originating bank can search the SWIFT network for a correspondent bank
that has arrangements with both banks.

Upon finding a correspondent bank having arrangements with both sides of

the transfer, the originating bank sends the transferred funds to its nostro
account held at the correspondent bank.

Using the example above, the correspondent bank deducts its transfer fee,
usually between $0 and $50, and transfers the funds to the receiving bank
in Japan. In transactions such as this, the correspondent bank adds value in
two ways:
  It alleviates the need for the domestic bank to establish a physical
presence abroad.
 It saves the work of setting up direct arrangements with other financial
institutions around the world.

Risks of Correspondent Banking

Correspondent banking poses some risk-management challenges because

the correspondent bank relies on its customer, the respondent bank, to
perform Know Your Client (KYC) due diligence on its customers.

Reliance on a third party’s compliance program—rather than conducting

KYC on all customers for whom the respondent bank is processing
payments through the correspondent bank—is why this activity is generally
considered to be high-risk, from a money-laundering perspective.

Correspondent Bank vs. Intermediary Bank

Although there are some similarities between both correspondent and
intermediary banks—namely that they act as third parties for other banks—
there is a major difference between the two.

While correspondent banks normally handle transactions involving

multiple currencies, an intermediary bank completes transactions involving
only a single currency. They are especially key for domestic banks that may
be too small to handle these types of transactions.

What Is a Correspondent Bank?

A correspondent bank is a third-party financial institution that acts as a go-
between for domestic and foreign banks that need to conduct cross-border
payments with each other.

What Is the Difference Between a Correspondent

Bank and an Intermediary Bank?
Correspondent banks and intermediary banks both serve as third-party
banks and are used by beneficiary banks, or receiving banks, to execute
international fund transfers and transaction settlements. The main variance
between correspondent banks and intermediary banks is often the number
of currencies in use in a transaction, with correspondent banks handling
more than one currency and intermediary banks generally working in one
currency.