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A correspondent bank is a bank that holds an account for another bank and makes payments on that bank's behalf, usually in a currency or a country where the other bank has no presence of its own. The bank that buys the service is called the respondent, and the arrangement between the two is correspondent banking.
The Committee on Payments and Market Infrastructures, the standard-setter for payments hosted by the Bank for International Settlements, defines correspondent banking in its 2016 report on the subject as "an arrangement under which one bank (correspondent) holds deposits owned by other banks (respondents) and provides payment and other services to those respondent banks".
For a business, the correspondent is the bank you never chose and rarely see: it appears as a line on a payment confirmation, as a deduction you did not expect, or as a question about what the payment is for. What it does, and what it is obliged to check, explains most of what happens to an international payment between the day it leaves and the day it lands.
First two figures: Bank for International Settlements, Quarterly Review, March 2020, on SWIFT data. Third: SWIFT, as cited in the 2016 correspondent banking report of the Committee on Payments and Market Infrastructures.
What does a correspondent bank do?
A correspondent bank gives another bank access to a currency and a payment system that the other bank cannot reach directly. It opens an account in the respondent's name, accepts the respondent's payment instructions, and pays out of that account to beneficiaries or to their banks.
The reason is structural. Final settlement in a currency happens on the books of that currency's central bank, and only banks established and admitted in that jurisdiction hold accounts there. A bank in one country that wants to pay dollars, euros or yen for its customers cannot reach those books itself. It either opens a branch or subsidiary in each currency zone, which only the largest groups can justify, or it keeps an account with a bank that is already there. The second route is correspondent banking.
The 2016 report distinguishes three forms. In the traditional form, the respondent alone uses the account to execute payments for its customers, who have no direct access to it. In nested correspondent banking, the respondent lets other banks use its relationship, so that several banks sit behind one account. In a payable-through account, the respondent's customers can operate the correspondent account directly. The last two give the correspondent less sight of who is behind a payment and attract closer scrutiny.
What are nostro and vostro accounts?
A nostro account and a vostro account are the same account seen from the two sides: the respondent bank calls its account at the correspondent its nostro ("ours"), and the correspondent calls that same account a vostro ("yours").
The difference is where the account sits on each balance sheet. For the respondent, the nostro is an asset: money it owns, deposited with another bank, in a foreign currency. For the correspondent, the vostro is a liability: a deposit it owes to the respondent on demand. A third term, loro ("theirs"), is used when a bank refers to an account that another bank holds with a third bank.
Two consequences matter for anyone sending money. The first is that the respondent must keep each nostro funded. Money in a dollar nostro is the respondent's own liquidity, parked abroad, and the bank needs one such balance for every currency it serves. If a payment instruction exceeds the balance, the payment waits until the respondent tops the account up, unless the correspondent has agreed a credit line. The second is that the two banks must agree on what the account contains. The correspondent sends statements; the respondent matches them against its own record of the nostro, entry by entry. An unmatched entry is a payment that one bank believes it made and the other has not booked, which is where the search starts when a transfer goes missing.
How does one payment move through one correspondent?
When the paying bank and the receiving bank both hold an account with the same correspondent, an international payment is a transfer between two accounts on that correspondent's books. No money crosses a border: three banks each change two entries in their own ledgers.
Take a worked example with illustrative figures. An importer holds a dollar account at Bank A, in a country outside the United States, and owes a supplier $50,000. The supplier banks with Bank B, in a third country. Neither bank has a presence in the dollar payment system. Both keep a dollar account with the same bank in the United States, called Correspondent C here. Before the payment, Bank A's nostro at C holds $400,000 and Bank B's holds $250,000, so C owes its two respondents $650,000 in total.
| Whose books | Entry | Before | After |
|---|---|---|---|
| Bank A | Importer's deposit (liability), down $50,000 | n/a | n/a |
| Bank A | Nostro at C (asset), down $50,000 | $400,000 | $350,000 |
| Correspondent C | Bank A's vostro (liability), down $50,000 | $400,000 | $350,000 |
| Correspondent C | Bank B's vostro (liability), up $50,000 | $250,000 | $300,000 |
| Bank B | Nostro at C (asset), up $50,000 | $250,000 | $300,000 |
| Bank B | Supplier's deposit (liability), up $50,000 | n/a | n/a |
Six entries, three banks. Correspondent C's total liability to its respondents is $650,000 before and $650,000 after: it has moved a claim from one respondent to the other and nothing has left its balance sheet. The dollars themselves never left the United States; what crossed the borders was a set of instructions.
The same table shows the funding constraint. Had Bank A's nostro held only $30,000 that morning, the instruction would have been $20,000 short, and the payment would have waited for Bank A to fund the account or for C to lend the difference.
What changes when two correspondents are involved?
When the two banks use different correspondents, the correspondents settle with each other through the currency's own payment system, across their accounts at the central bank. The payment now touches five institutions and ten ledger entries instead of three and six.
Keep the same $50,000 payment, but suppose Bank B's dollar account is with a different bank, Correspondent D, where it holds $250,000. Correspondent C cannot simply credit Bank B, because Bank B is not its customer. It has to pay D through the large-value payment system of the currency, which moves balances between the accounts the two hold at the central bank. Assume C starts the day with $900,000 at the central bank and D with $700,000.
| Whose books | Entry | Before | After |
|---|---|---|---|
| Bank A | Importer's deposit down; nostro at C down $50,000 | $400,000 | $350,000 |
| Correspondent C | Bank A's vostro down; balance at central bank down $50,000 | $900,000 | $850,000 |
| Central bank | C's account down; D's account up $50,000 | $1,600,000 | $1,600,000 |
| Correspondent D | Balance at central bank up; Bank B's vostro up $50,000 | $700,000 | $750,000 |
| Bank B | Nostro at D up; supplier's deposit up $50,000 | $250,000 | $300,000 |
Each row is two entries, so the table carries ten. The Before and After columns follow the nostro for Banks A and B, the central bank balance for C and D, and the combined balance of the two correspondents for the central bank row, which stays at $1,600,000. This time Correspondent C's balance sheet does shrink, by $50,000 on each side, and D's grows by the same amount: the money has left one correspondent for another, in central bank funds, which is the firmest form of settlement a currency offers.
What is the difference between the serial method and the cover method?
In the serial method, one message carrying both the customer details and the settlement instruction passes from bank to bank along the chain. In the cover method, the customer details go straight from the paying bank to the beneficiary's bank, and a separate interbank instruction moves the money through the correspondents.
The 2016 report of the Committee on Payments and Market Infrastructures describes both. The serial method consists of sending a customer payment message, the MT 103 in SWIFT's traditional format, from the originating bank to the receiving bank through one or more intermediaries; each pair of banks in the chain has a direct account relationship. The cover method, in the report's words, "decouples the settlement from the payment information": the MT 103 goes directly to the beneficiary's bank, and the funds follow through the correspondents under an interbank message, the MT 202 COV. That second message was introduced in SWIFT's 2009 standards release precisely so that the cover instruction would carry a copy of the customer details and every correspondent could screen them. The newer ISO 20022 message formats keep the same two-path logic.
| Criterion | Serial method | Cover method |
|---|---|---|
| Messages sent by the paying bank | One, passed along the chain | Two: one direct, one through the correspondents |
| What each correspondent receives | Customer details and settlement together | The settlement instruction with a copy of the customer details |
| Deductions on the way | Each intermediary typically deducts a fee from the amount | Intermediaries generally do not deduct from the interbank message |
| Speed | Each bank processes in turn | Generally considered faster |
| Requirement | An account relationship between each pair of banks | The two end banks must also be able to message each other directly |
The table follows the report's own wording on fees and speed. The report also says that which method costs a bank less overall cannot be determined in advance, and that both can be used in full compliance with anti-money-laundering rules when the data fields are filled in accurately. The choice belongs to the paying bank. A business does not select the method, but it sees the result: with a serial payment the amount may arrive reduced.
Why does a chain of banks form, and what does each link add?
A chain forms because a payment can only move between two banks that hold an account with each other, so any gap between the paying bank and the receiving bank has to be bridged by a bank that has accounts with both sides. Each bank added to the chain brings its own processing time, its own charge and its own compliance check.
The length of a chain is set by relationships, not by distance. A large international bank paying in its home currency may need no correspondent at all. A small bank in a small economy often has no direct account with a bank in the currency zone; it uses a larger regional bank, which uses its own correspondent, and the pattern can repeat on the receiving side.
Time is added because every bank works to its own cut-off hours, in its own time zone, with its own holidays, and releases a payment only once its checks are complete. A fee may be added because each bank does real work on a payment whose sender is not its customer; how those deductions add up is the subject of the article on how correspondent banking fees shrink a transfer. As a purely illustrative figure, a $20 deduction at each of the two correspondents in the second worked example would leave $49,960 of the $50,000 to be credited. A compliance check is added because each bank is answerable to its own regulator for what passes through its accounts, whatever the banks before it have already done.
That last point explains why the same payment can be screened three or four times, and stopped at the third bank after the first two released it. Each bank applies the law of its own jurisdiction and its own risk policy, and those differ.
Correspondent, intermediary, beneficiary bank: who is who?
The three terms describe roles in one payment, not kinds of bank: a correspondent bank holds the account of another bank, an intermediary bank is any bank that sits in the chain between the paying bank and the beneficiary's bank, and the beneficiary bank is the one that holds the account of the person being paid. One bank can play different roles in different payments on the same day.
| Role | What it is | Whose customer the bank serves |
|---|---|---|
| Ordering bank | Holds the payer's account and starts the payment; the respondent of its correspondent | The payer |
| Correspondent bank | Holds an account for another bank and pays out of it on instruction | The respondent bank, not the payer |
| Intermediary bank | Any bank between the ordering bank and the beneficiary bank in a given payment | The bank before it in the chain |
| Beneficiary bank | Holds the account of the person or company being paid | The beneficiary |
In the first worked example, Correspondent C is the correspondent of both banks and the only intermediary. In the second, C and D are both intermediaries; C is Bank A's correspondent and D is Bank B's. Payment forms add to the overlap by asking for an "intermediary bank" or a "correspondent bank" as if they were interchangeable. What the form wants, in either wording, is the bank where the beneficiary's bank keeps its account in the currency being sent. The beneficiary is the one who can supply it, by asking its own bank.
What does a correspondent bank check, and why?
A correspondent bank checks two things: the respondent bank itself, when the relationship is opened and throughout its life, and the payments that pass through the account, which it screens and monitors. It does so because it carries its own anti-money-laundering and sanctions obligations for everything that crosses its books, including payments whose sender and receiver it has never met.
The Financial Action Task Force, the international standard-setter on money laundering and terrorist financing, set out what is expected in its guidance on correspondent banking services, published in October 2016. Its Recommendation 13 requires additional measures for cross-border correspondent relationships. According to the guidance, the correspondent should gather sufficient information to understand the nature of the respondent's business, assess the respondent's own anti-money-laundering controls, obtain senior management approval before opening a new cross-border relationship, and verify that the respondent is not a shell bank, meaning a bank with no physical presence in the country where it is licensed, and does not let shell banks use its accounts. Where nested relationships or payable-through accounts exist, the correspondent has to be informed of them and control the added risk.
The guidance is equally clear about a limit. The FATF Recommendations, it states, "do not require financial institutions to conduct customer due diligence on the customers of their customer". The correspondent is not expected to know every importer and supplier behind its respondents. What it must do is monitor the activity on the account for unusual transactions, changes in the respondent's risk profile or departures from the agreed terms, and screen payments, including for missing originator and beneficiary information. When a payment raises an alert, the guidance says the request for additional information should be targeted on the specific transaction that created it.
That request is what a business experiences as a held payment. The correspondent asks the respondent, the respondent asks its customer, and the answer travels back the same way. Sanctions screening works alongside it: a correspondent screens names, countries, vessels and goods against the lists that bind it in its own jurisdiction, which may be stricter than the lists that bind the banks at either end. A payment that is lawful where it starts and where it ends can still be stopped in the middle, because the bank in the middle answers to a third legal system.
What is de-risking, and how far have correspondent relationships declined?
De-risking is the decision by a bank to end or restrict a category of relationships in order to avoid a risk instead of managing it, and in correspondent banking it shows up as a measurable fall in the number of relationships. The Bank for International Settlements reported in its Quarterly Review of March 2020 that the number of active correspondent banks worldwide fell by 20% between 2011 and 2018, even as the value of payments increased.
The same article, based on SWIFT data, found that the number of corridors, meaning pairs of countries between which payments flow, fell by 10% over the period, from 10,800 to 9,800. By region the decline ranged from 12% to 30%, with Northern America at the low end and Latin America at the high end. The Financial Stability Board, working from the same SWIFT source, had reported in November 2018 a fall of 15.5% in active correspondents and 7.3% in active corridors between January 2011 and the end of 2017.
The Financial Stability Board's update also shows who lost most. It measured how many foreign counterparties each local bank has, grouped by the size of the economy.
Financial Stability Board, Correspondent Banking Data Report update, November 2018, on SWIFT data to the end of 2017.
On causes, the 2016 report of the Committee on Payments and Market Infrastructures names the rising cost of regulatory compliance as the most common reason correspondent banking became less profitable, alongside uncertainty over how far a correspondent must know its respondents' customers, the downsizing that followed the financial crisis, and rising country risk. A correspondent account for a small respondent in a higher-risk country can cost more to supervise than it earns, and the correspondent bears the regulatory consequences if something passes through it. The FATF's position, stated on the page presenting its guidance, is that de-risking "is not in line with the FATF Recommendations", which ask for risks to be managed case by case; it adds that de-risking can result in financial exclusion and less transparency.
What does de-risking mean for a business in an affected country?
For a business in a country that has lost correspondent links, de-risking means fewer routes for the same payment: longer chains, less choice of bank, and in some cases a currency or a destination that local banks can no longer serve. The Financial Stability Board warned in its 2018 update that the decline may affect the ability to send and receive international payments, or drive some payment flows underground.
The effect is concentration before it is exclusion. The same update found that the decline in small economies had not, on average, reduced the volume and value of the payment messages they received; payments kept flowing, through fewer banks. In practice a local bank that has lost its own dollar account can continue to offer dollar payments through another bank's account, the nested arrangement described earlier: the payment still arrives, with one more link in the chain.
What a business notices is indirect. Its bank announces that it no longer handles a currency, or handles it only for certain customers. Incoming funds from a given country are returned with no reason stated, because the correspondent, not the local bank, declined them. The practical routes for individuals and firms in that position are covered in the articles on getting paid from a country with limited banking access and on how a freelancer in a country with limited banking gets paid. When the difficulty sits at the correspondent level, rewording the invoice will not solve it; asking the bank which correspondent it uses is the place to start.
What can a business do to make a correspondent payment go through cleanly?
A business cannot choose its bank's correspondents, but it controls three things that decide how a payment fares in the chain: knowing the route, supplying complete data, and choosing who bears the charges.
- Ask your bank which correspondent it uses for the currencyAsk for each currency you trade in, and ask whether the account is your bank's own or reached through another bank. A direct account means a shorter chain.
- Ask the beneficiary for its bank's correspondent in that currencyThe beneficiary's bank knows where it keeps its account. Entering it in the intermediary or correspondent field saves the paying bank from guessing a route.
- Give complete beneficiary dataFull legal name as it appears on the account, full address with country, account number in the format the destination uses, and the bank's identifier code. A name that differs from the name on the account invites a query.
- State the purpose in plain wordsWrite what the payment is for and quote the invoice or contract number. Some countries require a purpose code; ask the beneficiary.
- Choose the charge option deliberatelyShared charges mean each side pays its own bank and deductions on the way fall on the amount; charges borne by the sender aim to deliver the full amount; charges borne by the beneficiary deduct everything from the payment. Match the choice to what the contract says the beneficiary must receive.
- Keep the documents within reachInvoice, contract, shipping papers, and for a new counterparty a note of who they are and what they sell. If a correspondent asks, a same-day answer keeps the delay short.
Tell your bank in advance about a payment that is unusual for your account, in size, country or counterparty, so that the explanation is on file before an alert is raised. When a payment is held, ask your bank which bank in the chain raised the query and exactly what it asked for: answering the specific question is faster than sending everything you have.
What are the alternatives to correspondent banking?
The alternatives all shorten or replace the chain of accounts: a bank or payment institution that is present in both countries and settles through local payment systems on each side, direct links between national payment systems, and transfers of value onchain, where the payer and the payee settle on a shared ledger. Each has its own reach, costs and regulatory conditions, and none removes the need for a bank account at the point where the money becomes a local deposit again.
For large amounts and for most currencies, correspondent banking remains the route that reaches almost any bank account in the world, which is why it is worth understanding even for a business that uses something else for its routine payments.
