CHAPTER FOUR INTERNATIONAL CORRESPONDENT BANKING RELATIONSHIP Correspondent banking

CHAPTER FOUR INTERNATIONAL CORRESPONDENT BANKING RELATIONSHIP.

• Correspondent banking relationship is the cornerstone for the functioning of international banking. It is the frame-work for transferring funds, exchanging funds and financing international trade through the banking system • International banking system exists because banks in different countries are willing to cooperate in doing business with each other. • At the initiation of a relationship, the two banks will exchange information (terms and conditions) on the services they can perform for each other (collections, payments, letter of credit, foreign exchange, securities) and the fees for this services. The banks also exchange signature books and confidential telegraphic test keys.

1. Accounts in an International Department • The basis, upon which international banking rests, is that, banks in one country maintain deposit accounts with banks in other countries to serve the needs of the customers of both banks. When funds are debited or credited in such account money is said to “move from one country to another”. • Due To Accounts • A demand account maintained by a foreign bank in a US bank is referred to as a Due To or Vostro account. The account is denominated in US dollars (foreign banks make payment to other countries, handle collections and settle drafts under letter of credits)

• Due From Account • An account maintained by US banks in a foreign bank is referred to as a Due From or Nostro account. It is denominated in the currency of the foreign country. • Using the Account • The establishment of only one account between two banks is sufficient for the conduct of all their business, for transfer of funds from one country to the other, for payments to be made in either country in either currency or to a third country in that country’s currency.

• Domestic Correspondent Banking • International department of major banks in US also made their facilities available to other bank in US. • Transaction Entries • What’s happens when a US banks issues a foreign draft or remittance order $1000 in US currency on behalf of it’s customers. • US Bank • (1) Cash from customers+$1000 • (2) Due to foreign bank account +$1000 Foreign Bank • (2) Due from US bank account +$1000 • (3) Cash payment to beneficiary -$1000 (equivalent) If the US customer wants to have a draft or remittance order to be issued in foreign currency, the two banks entries will be as following:

US Bank • (1) Cash US customer +$1000 • (2) Due from foreign bank account-$1000 (equivalents) Foreign • (3) Cash payment to beneficiary -$1000 (equivalent) • (2) Due to bank account -$1000 (equivalent)

Other Services • If a customer of a foreign bank wishes to buy US stocks or bonds, the foreign bank can request the assistance of the US bank. • The foreign bank may assist by introducing US banks and their customers to local business or vice versa. The US bank may assist by introducing foreign banks to US customers to US businesses. • A foreign bank, trading in the foreign exchange or euro dollar market can use its US dollar account to settle the transaction by crediting to it’s Due To account. • The smaller foreign bank often looks to its US correspondent bank as a source of credit (loan syndications).

2. Accounting • Due to accounts foreign banks are listed in the financial statement as liabilities and the central bank require reserve to be held against these deposits. Deposits in overseas does not require to maintain reserve balance at the Federal Reserve Bank (the Fed). • Due from accounts are listed as assets. • Establishing correspondent banking relationship is vital for banks. It allows a small bank to gain assistance from a larger bank in credit and international operations. • Banks become correspondents of foreign banks in order to have access to local markets and currencies, to settle trading transactions and to have a local bank that can provide various services. A US bank with a large correspondent network, benefits from the earnings of increased deposit balances, opportunities foreign exchange and money market trading volume and fees from many of the noncredit services.