Correspondent banking
Correspondent banking is an arrangement in which one bank (the correspondent) holds deposits for another bank (the respondent) and makes and receives payments for it, usually in a currency or country where the respondent has no direct access. It underpins most cross-border payments and requires due diligence on the respondent.
Roles that need it
What it is
Correspondent banking is an arrangement in which one bank (the correspondent) holds deposits for another bank (the respondent) and provides payment and other services to it. The respondent uses the account to make and receive payments in a currency or country where it has no direct access to the local payment system. From the respondent’s view the account is a nostro (“our money held by you”); from the correspondent’s view it is a vostro (“your money held by us”). Payments move as messages, most often over Swift, and settle as debits and credits on these accounts.
Why it matters
Most cross-border payments between banks still pass through one or more correspondents. Each link adds cost, time, liquidity needs and compliance checks. The Committee on Payments and Market Infrastructures (CPMI) has reported a steady fall in the number of correspondent relationships since around 2011, partly because of the cost of anti-money laundering and sanctions controls. Correspondents must know their respondents well, and EU anti-money laundering rules require enhanced due diligence for respondents outside the European Economic Area. The G20 programme to make cross-border payments faster, cheaper and more transparent targets these chains directly.
Worked example
Illustrative numbers. A small bank in Tirana wants to send 100,000 US dollars for a client to a supplier in Chicago. It has no access to US payment systems, so it holds a nostro account with a correspondent in New York. It sends a pacs.008 payment message to the correspondent, which debits the nostro, pays the supplier’s bank through the local system and deducts a 25 dollar fee. With shared charges (SHA), the supplier receives 99,975 dollars, or less if a further intermediary takes a fee. The small bank keeps an average of 2 million dollars in the nostro to cover outgoing payments, and that idle balance has a funding cost.
Who uses it
Payments sales for financial institutions (PCMSALES-FI) win and manage respondent banks. Payments messaging specialists (SWIFTOPS) maintain message flows and relationship management application (RMA) permissions. Payments operations analysts (PAYOPS) investigate delays and returns along the chain. Corporate onboarding analysts (KYC-CORP) perform due diligence on respondent banks. Sanctions analysts (AML-SANC) screen payment parties and the chain of banks. Treasury operations analysts (TRESOPS) fund nostro accounts and reconcile them.
Common confusions
A correspondent relationship is a standing account arrangement, while an intermediary is a role a bank plays in one payment; one relationship can serve as an intermediary step in many chains. Nested correspondent banking happens when the respondent lets its own bank clients use the account, which raises extra due diligence questions. Cover payments (MT 202 COV or pacs.009 COV) move the funds between banks while the customer details travel in a separate message; serial payments pass the full customer message from bank to bank. Finally, de-risking, the closing of relationships to reduce risk, is a policy concern because it can cut whole regions off from payment channels.