Acorrespondent account is an account (often called a nostro or vostro account) established by a banking institution to receive deposits from, make payments on behalf of, or handle other financial transactions for another financial institution. Correspondent accounts are established through bilateral agreements between the two banks.
Commonly, correspondent accounts are the accounts of foreign banks that require the ability to pay and receive the domestic currency. The accounts allow them to pay others from the account or receive money from others into the account. This allows the bank to offer various services to their customers such as foreign exchange and foreign currency denominated loans and deposits, despite their not having a bank licence for the foreign country in that country's currency.
Such accounts are necessary for international trade that requires people and businesses to pay for things in a currency other than their own. It is impractical to transport large amounts of currency around the world and physically exchange domestic currency for the currency that your customer/supplier demands. Instead, money is taken out of an account at a local bank (which is in local currency) and an equivalent amount of money is put in the customer's or supplier's account at their local bank (in a foreign currency). The money from your account goes to an internal account of your bank. The money to your customer or supplier comes from an account your local bank holds with a bank in your supplier's country - your bank's correspondent account, at their correspondent bank.[1]
A customer of Wells Fargo Bank in Minneapolis might wish to pay a German firm €1,000,000 for machinery the customer has purchased. Wells Fargo determines that, at an exchange rate of $1.30 to one Euro, this is equivalent to U.S. $1,300,000. Wells Fargo has a correspondent banking relationship with Deutsche Bank in Frankfurt. Wells Fargo takes the $1,300,000 out of the customer's bank account, and instructs Deutsche Bank to take €1,000,000 out of Wells Fargo's correspondent account at Deutsche Bank and pay the euros to the German firm's account.
The customer receives its machinery and the supplier has its money (in euros). Wells Fargo's account is balanced, having fewer euros and a correspondingly greater amount of U.S. dollars.
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