One way to speed up and simplify payments and settlements is to establish correspondent relations between banks. Namely, a network of correspondent accounts, supported by banks of different countries, provides the most efficient functioning of the international system of settlements and payments.
The term “correspondent” comes from the French correspondent, which means to answer, inform. In turn, to effect settlements, banks enter into contractual relations for the settlement of mutual monetary obligations. Such relations are called correspondent. In other words, the basis on which international banking continues to be built is primarily the maintenance of current operating accounts (demand deposits) with banks of other countries to serve the needs (both client and own) of both banks. When funds are debited or credited to such an account, the money is said to “move” from one country to another.
In the process of establishing correspondent relations, banks open each other correspondent accounts, which are subdivided into:
- nostro accounts;
- accounts of the “loro” type.
Accounts of “nostro” (from Latin nostro – “our”) are accounts opened by domestic banks in a foreign correspondent bank (i.e. our account with them).
Loro accounts (from Latin loro – “them”) are the accounts of a foreign correspondent bank in a domestic bank.
The peculiarity of these accounts is their mirror nature. That is, the same account for one bank is a “nostro” account, while for another bank it is “loro”.
Due to various circumstances, it is possible that when setting up correspondent relations, banks may not open accounts to each other, i.e. correspondent without an account. In this case, all settlements are made through accounts opened in a third bank, which correspondent banks trust.
Thus, inter-bank correspondent relations allow a small bank to receive assistance from a major correspondent bank in the form of a loan or in the form of servicing international transactions of both the bank itself and its clients. In turn, large international banks can access local markets in developing countries, using a network of correspondent relations with resident banks of these countries. This makes it possible to carry out operations to diversify risks, as well as to generate high incomes.