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Correspondent Banking and Interbank Accounts

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Correspondent Banking and Interbank Accounts To discuss the reasons for international banking To define correspondent banking relationship To define Nostro and Vostro ... – PowerPoint PPT presentation

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Title: 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.
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