One of the ways to accelerate and simplify payments and settlements is to establish correspondent relations between banks. Namely, the network of correspondent accounts supported by banks of various countries most effectively ensures the functioning of the international system of settlements and payments.
The term “correspondent” comes from the French correspondent, which means to answer, to inform. In turn, for the implementation of settlements, banks enter into contractual relations to regulate mutual monetary obligations. Such relationships are called correspondent. In other words, the basis on which the international continues to build banking is the maintenance, first of all, of current operating accounts (demand deposits) in banks of other countries to service the needs (both client and own) of both banks. When funds are debited or credited to such an account, then the money, as they say, is “moving” from one country to another.
In the process of establishing correspondent relations, banks open correspondent accounts for each other, which are divided into:
nostro accounts; Loro type accounts.
Nostro accounts (from lat. Nostro – “ours”) are accounts opened by domestic banks in a foreign correspondent bank (i.e., our account is with them).
Accounts of the “loro” type (from lat. Loro – “them”) are the accounts of a foreign correspondent bank in a domestic bank.
A feature of these accounts is their mirror character. That is, the same account for one bank is a “nostro” account, while for the other – “loro”.
Due to various circumstances, a situation is possible where banks, when establishing correspondent relations, may not open accounts for each other, i.e. correspondent without account. In this case, all settlements are made through accounts opened in a third bank, which is trusted by correspondent banks.
Thus, interbank correspondent relations allow a small bank to receive assistance from a large correspondent bank in the form of a loan or in the form of servicing international operations of both the bank and its customers. In turn, large international banks can gain access to 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 generate high incomes.