Payments system- #2
Correspondent banking &
account relationships
Waquar Ahmad
Strategy #2 Correspondent banking & account relationships
France belongs to a monetary zone, the Euro zone. EBA systems, CORE and TARGET2 are all
denominated in Euro
If a Bank in France wants to send or receive USD or JPY, it is not possible through these
systems. They have to connect/access with their payment systems to send or receive funds in
their currency.
How then do French banks send and receive funds in different currencies?
This brings us to the strategy number 2
• Principles of Correspondent Banking and
• Account relationships between banks located in different currency zones.
Strategy #2 Correspondent banking & account relationships
let’s look at two payments systems located in two different countries: France and USA.
Strategy #2 Correspondent banking & account relationship
If a French Bank wants to send or receive US dollars, then it needs to get access to the USA
payments systems. The same thing applies for a US Bank. If it wants to send or receive EUR, then
it needs to get access to the EUR payments systems.
And how do they do that?
Simply by becoming customer of a Bank located in the monetary zone that they want to access.
A bank, customer of another bank? (Correspondent account relationship)
Correspondent account relationships
Correspondent account relationship
The French Bank (Bank 5) asks a US bank offering correspondent account services to open an account
for itself. The US Bank (Bank E) may do the same, but it is not mandatory.
We see on the picture that Bank 5 becomes an end party of Bank E and Bank E becomes an end party
of Bank 5. Now, both Bank 5 and Bank E offer correspondent account services to each other.
• When the French bank opens an account with a bank in the USA, both banks enter into what is
called correspondent account relationship.
• The bank in the USA becomes the correspondent of the French Bank in USD currency.
• The account is opened in the book of the bank in the USA, but it is the account of the French bank.
Types correspondent account relationship
• Unilateral - If Bank 5 opens an account with Bank E, but Bank E does not open an account
with Bank 5, then both enter into a unilateral account relationship. The relationship is unilateral
because there is only one account opened.
Citi calls the BNPP account that it holds Vostro account.
BNPP its account at Citi Nostro account.
Note: that it is the same account, but considered from different perspectives.
BNPP does open an account in his own book: the mirror account - just to follow what is
happening on the real account and manage liquidity. It does not contain real money.
Types correspondent account relationship
• Bilateral - If Bank 5 opens an account with Bank E and Bank E open an account with Bank 5,
then both enter into a bilateral account relationship.
BNPP calls the account of Citi in its book Vostro account and its account at Citi Nostro account.
Citi calls the account of BNPP in its book Vostro account and its account at BNPP Nostro account.
BNPP opens the mirror account of its account at Citi in its own books . Citi does the same for its
account with BNPP.
The correspondent network
One of the first decision a bank must make in cross border payments is to determine the currencies it
will handle. There are around 180 currencies in the world
The total number of currency accounts that a bank possesses in different currency zones is its
correspondent network.
The banks offering cross border payments services will always have Nostro accounts in all major
currencies.
Usage of the correspondent accounts
After opening a Nostro account with a correspondent, a direct deposit is required to credit the account.
How then will the Bank use its Nostro account and for what purpose?
Usage of the correspondent accounts
The bank obviously puts own money on its Nostro account. But the bank also puts the funds of its
customers who have accounts in the same currency on the same nostro account.
When a customer opens an account in USD Dollar with BNPP, BNPP opens an account in its book in
USD. But the (real) funds are kept on the Nostro account(s) in the USA. Again a Bank may open many
accounts with the same or different banks in USD.
If a customer or BNPP wants to transfer funds to a party in USD, BNPP will instruct the correspondent
(Citi) to debit its account and credit the beneficiary account in the USA.
On the other hand, if BNPP or one of its customer receives funds, then the BNPP Nostro account(s) in
the USA will be credited. For customers, BNPP will ultimately ensure that the amount credited /
debited is reflected on the customer account.
Usage of the correspondent accounts
But how do banks instructs banks ???
