A correspondent account is an account used for settlements of one credit institution on behalf of another on the basis of a concluded correspondent agreement.
International banks serve national or regional banks, thereby providing services to their clients. Small banks are correspondents of large banks for various services on international or national markets, primarily loans. Large banks, being correspondents of smaller ones, gain access to regional markets.
Types of correspondent accounts
Correspondent accounts are divided into nostro and loro accounts. Nostro is an account opened in the name of a bank with an intermediary bank, or the so-called correspondent bank. A loro is an account that is opened in a given bank in the name of its correspondent bank.
Basics of Correspondent Relations
In most cases, no or very little interest is paid on correspondent accounts. In addition, banks provide for a commission for maintaining such an account and performing transactions on it. In this regard, banks prefer to keep minimum balances on nostro accounts, seeking to place capital on world markets. To raise funds, banks use a wide variety of schemes for placing balances on correspondent accounts in international currency markets.
However, banks must maintain a sufficient balance in the correspondent account to meet all possible payment requirements. In cases where the account lacks the necessary funds, the bank can provide its correspondent with a short-term loan, the so-called overdraft. It is logical to assume that the interest on such a loan is quite high, and in some countries overdraft is prohibited by law.
Nostro and internal correspondent account totals are reconciled on a monthly basis. For this, a report is drawn up, which reflects all the mismatched amounts for these two accounts. In the future, they are subject to settlement.
Valuation
An important point in transactions with accounts is such a concept as value. A record of a particular operation on a certain day does not mean that funds are deposited into the owner's account on the same day. In this operation, the key point is value setting - an additional entry in the date invoice next to the posted amount in the statement. This means that the owner of the account can dispose of the received amount immediately, but the money becomes the owner's property with the accrual of the corresponding interest from the date of value. If the account holder decides to dispose of the received currency funds before the value date, he will exceed the loan, for which he will be forced to pay the agreed interest to the creditor bank.
