An overview of the system

The international banking system has its roots in the domestic monetary systems of each individual country.Banks in the domestic monetary systems include foreign branches and subsidiaries and are supervised by the domestic monetary authorities.They are linked by the domestic communications system and domestic transactions are cleared by the domestic clearing system.

Besides transactions with domestic financial institutions, banks also deal with foreign financial institutions.For these transactions a foreign intermediary is necessary.The most common relationship is a correspondent agreement, whereby domestic banks undertake transfers on behalf of the clients of foreign banks.Transfers between the correspondent bank and the foreign bank’s client are cleared on the domestic clearing system.Transfers between the foreign bank and its correspondent are cleared either bank to bank or through the domestic system of the currency that is being transferred.Communications between correspondent and foreign bank are carried out by telephone, telex, fax, mail and more commonly through the specialized SWIFT network.

Banks that require a higher level of service maintain representative offices or agencies in foreign countries.An even higher level of service can be achieved by establishing a branch or a fully fledged subsidiary.Communications between branch or subsidiary and parent are closer than correspondent foreign bank communications but they are basically carried out on the same systems.

International banks have developed an offshore network of transactions that are outside the jurisdiction of any single regulatory authority.These transactions routinely use both domestic and international communications systems and clearing facilities.Operations are conducted from financial centers with a developed domestic financial system such as London, Paris or New York, and they are also conducted from centers with relatively small domestic financial systems specializing in international transactions such as the Cayman Islands, Singapore, and the Channel Islands of Jersey and Guernsey.

Communications and information processing have evolved to the point that geographical distance has almost become irrelevant.The well developed network of correspondent arrangements and physical presence in the form of representatives, agencies, branches and subsidiaries ensure that the communications possibilities are exploited intensely and in increasingly inventive ways.The result is a highly integrated system where it is often difficult to discern where one market begins and the other ends.