Correspondent banking

A correspondent bank is a bank located in another city, state or country that provides a service for another bank.Correspondent banking originally developed to facilitate long-distance payments, both domestic and foreign.In return for this service, client banks kept relatively large, interest-free balances with the correspondent bank.The term “correspondent” refers to the days before telecommunications when the mail and the telex were used for settling accounts.Today, as we mentioned, these have largely been replaced by SWIFT and computerized international clearing houses such as CHIPS (Clearing House Interbank Payments System).

International correspondent banking has evolved over the years as it has become more competitive.Cross-border funds transfers are still the largest single area of international correspondent banking, although services can extend to granting loans, setting up business contacts and giving advice.While interest-free demand balances remain the glue that holds the banks together and represents the main way that banks pay for correspondent services, fees have assumed a certain importance.Banks can now opt to pay by fee or a combination of fees and interest-free balances.When balances represent payment, they are now more rigorously enforced than they were in the past.

Most smaller banks have correspondents in countries where they do business and large banks have correspondent arrangements in most countries where they do not have an office of their own.Correspondent banking has the advantage of offering a range of international banking services while making it possible to scale costs to the amount of service required in a given area.The disadvantage is that correspondents are not likely to give top priority to another bank’s clients.