A correspondent bank is one that manages operations on behalf of another financial institution that does not have branches in the country.
Banks, in general, turn to other intermediary companies to act as their correspondents in distant regions. That way, they can carry out transactions abroad.
Correspondent banks may, on behalf of a third party, accept deposits , transfer money , manage loans , among others.
Given that the universal banking model is increasingly widespread, companies in the sector sign correspondent agreements. Thanks to these agreements, each party can act on behalf of the other in their respective nation.
Correspondent banks in international transfers
Correspondent banks are necessary in international transfers . They are responsible for managing the operation in the country of destination, which includes currency conversion .
To proceed with the above, it is required that the correspondent bank has opened an account in the name of the institution from which the money transfer was ordered.
When a credit institution wants to refer to the capital it maintains deposited in a correspondent bank, it refers to it as the ‘nostro’ account.
Likewise, the correspondent bank calls the ‘vostro’ account to the money that it manages and that is owned by another financial company.
In conclusion, the terms ‘nostro’ and ‘vostro’ can be used to refer to the same bank account. However, this varies depending on whether we are speaking from the point of view of the depositor or the depositary .
Reasons to use correspondent banks
Among the main reasons for using correspondent banks include:
- The financial institutionmay offer its services to a wider audience. This, without having to open and maintain new branches in countries where their market share is minimal or non-existent.
- They allow access to international financial markets. That is, it is a way of approaching large investors who operate in other countries and continents.
- They allow people to more easily carry out operations in different parts of the world. For example, when they are traveling.