Correspondent account

Acorrespondent accountis an account (often called anostro or vostro account) established by abanking institutionto receive deposits from, make payments on behalf of, or handle otherfinancial transactionsfor another financial institution. Correspondent accounts are established through bilateral agreements between the two banks.

Application

Commonly, correspondent accounts are the accounts of foreignbanksthat require the ability to pay and receive the domesticcurrency.A bank will typically require correspondent accounts for holding currencies outside of jurisdictions where it has a branch or affiliate. This is because mostcentral bank settlement systemsdo not register deposits or transfer funds to banks not doing business in their countries. With few exceptions, the actual funds held in any foreign currency account (whether for a bank or for its customer) are held in the bank's correspondent account in that currency's home country.

Even where a bank has branches or affiliates in multiple jurisdictions, balances in a foreign currency account in one jurisdiction are held with a correspondent account at either that bank's branch or affiliate in the foreign country, or at another institution. For example,HSBCreceivesUS dollarsat its affiliate,HSBC Bank USA,whileDBS BankSingapore receives US dollars atJPMorgan Chase.

Example

A Dutch oil company is a customer ofINGin Amsterdam, and sells a cargo of 500,000barrelsof oil for $40 million to a Swiss trading company who is a customer ofCredit Suisse.ING Amsterdam holds its dollars atBank of America(BofA) and Credit Suisse holds its dollars atThe Bank of New York Mellon(BNY). When the Swiss trader instructs its bank to pay the money, Credit Suisse debits the trader's account and transfers dollars from its correspondent account at BNY to ING's account at BofA. Then, ING credits the dollars to the oil company's dollar account in Amsterdam.

See also

• Hawala
• Hundi
• Informal value transfer system
• Nostro and vostro accounts

Sources

• 31 U.S.C.§ 5318A(e)(1)(B)–Title 31 of the United States Code- Special measures for jurisdictions, financial institutions, international transactions, or types of accounts of primary money laundering concern
• Title III, Section 311(e)(1)(B), United StatesPatriot Act
• European Central Bank."Glossary of terms related to payment, clearing and settlement systems"(PDF).