A correspondent account is an account (often called a nostro or vostro account) established by a banking institution to receive deposits from, make payments on behalf of, or handle other financial transactions for other financial institutions.
Commonly, correspondent accounts are the accounts of foreign banks who require the ability to pay and receive the domestic currency. The accounts allow them to pay others from the account or receive money from others into the account. This allows the bank to offer various services to their customers such as foreign exchange and foreign currency denominated loans and deposits, despite them not having a bank licence for the foreign country in that country's currency.
Such accounts are necessary for international trade which demands people and business pay for things in a currency other than their own. It is impractical to transport large amounts of currency around the world and physically exchange your own currency for the currency that your customer/supplier demands. Instead money is taken out of your account at your local bank (which is in your local currency) and an equivalent amount of money is put in your customer/suppliers account at their local bank (in a foreign currency). The money from your account goes to an internal account of your bank. The money to your customer/supplier comes from an account your local bank holds with a bank in your supplier's country - your bank's correspondent account, at their correspondent bank.
For example, a customer of Wells Fargo Bank may wish to pay a German firm EUR1,000,000 for machinery. Wells Fargo determines that this is equivalent to USD1,200,000. Wells Fargo takes the $1,200,000 out of the customers bank account, and instruct their German correspondent bank -- perhaps Deutsche Bank -- to take EUR1,000,000 out of Wells Fargo's correspondent account with Deutsche Bank, and pay the money into the German company's EUR.
So, the customer has their machinery. The supplier have their money (in EUR) . Wells Fargo is square by having fewer EUR, correspondingly greater amount of USD.
It is established through bilateral agreements between two counterparts (in this case two financial organisations) to support the multi lateral economic balances established throughout the globe. <Arifeen, HSBC Bangladesh>
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