Correspondent Banking and Interbank Accounts

1
Correspondent Banking and Interbank Accounts

• To discuss the reasons for international banking
• To define correspondent banking relationship
• To define Nostro and Vostro accounts
• To explain the operations of Nostro and Vostro
  accounts
• To explore the future development in
  international banking

2
International Banking

• International banking is the cross-border
  extension of a banks services. There are
  several reasons for international banking
• Growth Foreign markets offer opportunities to
  growth not found domestically.
• Diversification There will be greater stability
  of earnings due to risk reduction.
• Low marginal costs Managerial and marketing
  knowledge developed at home can be used abroad
  with low marginal costs.

3
International Banking

• Knowledge advantage The foreign subsidiary can
  draw on the parent banks knowledge of personal
  contacts and credit investigations for use in the
  foreign market.
• Regulatory advantage Multinational banks are
  often not subject to the same regulations as
  domestic banks.
• Prestige Large multinational banks have high
  perceived prestige to attract new clients.

4
International Banking

• Wholesale strategy Banks follow their
  multinational customers abroad to avoid losing
  their business at home and abroad.
• Retail strategy Multinational banks compete for
  retail banking services such as travellers
  cheques, remittance and foreign exchange.

5
Types of international banking presence

• Correspondent banks
• Representative offices
• Foreign branches
• Subsidiary and affiliate banks

6
Correspondent Banking Relationship

• A correspondent banking relationship is
  established through a bilateral contract with a
  foreign bank to cooperate in such banking
  services as money transfer, foreign exchange and
  trade finance. Banks use correspondent banking
  relationship to deliver services to customers in
  markets where the bank has no physical presence.
  A correspondent bank provides services to a
  respondent bank. Both banks maintain
  correspondent balances in each others interbank
  account.

7
Nostro and Vostro Accounts

• Nostro Account means our account with you. It is
  also called Due from Bank account. It is an
  account held by a bank with another bank in a
  foreign country, usually in the currency of that
  foreign country. For example, Hang Seng Bank
  Hong Kong maintains a sterling pound account with
  Midland Bank London.

8
Nostro and Vostro Accounts

• Vostro Account means your account with us. It is
  also called Due to Bank Account. It is an
  account maintained by a bank for a foreign bank
  in domestic currency. For example, Midland Bank
  London maintains a Hong Kong dollar account with
  Hang Seng Bank Hong Kong.

9
Operations of Nostro and Vostro accounts

• Hang Seng Banks sterling pound account with
  Midland Bank has a credit balance of 100,000.
  Midland Banks Hong Kong dollar account with Hang
  Seng Bank has a credit balance of 900,000.

10
Operations of Nostro and Vostro accounts
Hang Seng Banks Ledger
Due to Midland Bank Account
Balance b/f 900,000
Due from Midland Bank Account
Balance b/f 100,000
11
Operations of Nostro and Vostro accounts
Midland Banks Ledger
Due to Hang Seng Bank Account
Balance b/f 100,000
Due from Hang Seng Bank Account
Balance b/f 900,000
12
Operations of Nostro and Vostro accounts

• Mr. Wong is a customer of Hang Seng Bank who
  maintains a sterling pound account and the
  balance is 50,000. Mr. Wong instructs Hang Seng
  Bank to remit 20,000 to his daughter Miss Wong
  in London who maintains a sterling pound account
  with Midland Bank and the balance is 800.
• ABC Company is a customer of Midland Bank and
  instructs the bank to remit HK300,000 to XYZ
  Company which is a customer of Hang Seng Bank.

13
Operations of Nostro and Vostro accounts
Hang Seng Banks Ledger
Due to Midland Bank Account
Balance b/f 900,000
XYZ Company 300,000
Due from Midland Bank Account
Balance b/f 100,000
Mr. Wong Account 20,000
14
Operations of Nostro and Vostro accounts
Hang Seng Banks Ledger
Mr. Wong Account
Balance b/f 50,000
Due from Midland Bank 20,000
XYZ Company Account
Due to Midland Bank 300,000
15
Operations of Nostro and Vostro accounts
Midland Banks Ledger
Due to Hang Seng Bank Account
Balance b/f 100,000
Miss Wong 20,000
Due from Hang Seng Bank Account
Balance b/f 900,000
ABC Company 300,000
16
Operations of Nostro and Vostro accounts
Midland Banks Ledger
Miss Wong Account
Balance b/f 800 Due to Hang Seng Bank
20,000
ABC Company Account
Due from Hang Seng Bank 300,000
17
Future Development of International Banking

• Correspondent banking relationships satisfy the
  needs of customers for international banking
  services. Since foreign exchange transactions
  from the domestic currency incur high costs
  depending on the foreign exchange spread applied
  to the payment, a bank may maintain a foreign
  currency account for its customer and effect
  payments via its correspondent banking network,
  While maintaining a foreign currency account for
  a customer may eliminate much of the foreign
  exchange cost, it does not necessarily allow for
  the timely information of reporting both payments
  from and receipts to the account.

18
Future Development of International Banking

• To solve the problems, and as corporate customers
  have become more internationally astute, a local
  bank can develop a strategic alliance with a
  multinational bank to obtain the international
  cash management (ICM) services. Firstly, the
  bank can establish a main account in each foreign
  currency with various sub-accounts. Secondly,
  receipts and payments are segregated for high
  volume corporate customers to facilitate
  reconciliation. Then the banks treasury
  department can also benefit from increased
  foreign currency deposits.

19
Future Development of International Banking

• The prerequisite for this solution is the
  development of an electronic banking system with
  multi-currency capabilities. The bank must also
  be able to map SWIFT messages to and from
  customer accounts so that the customers can
  receive real-time account reporting subject to
  the banks cut-off times for different currencies.

20
Future Development of International Banking

• ICM is an innovative way of looking at
  correspondent banking. The advantages of ICM are
  
• There are global expansion opportunities with
  controlled costs.
• It provides a competitive and cost conscious
  solution to the problems of traditional
  correspondent banking.
• It eliminates the costs of establishing a large
  branch network in foreign markets.