Correspondent account

A correspondent account is a type of account that a bank opens in another credit institution or in a subdivision of the Central Bank in order to reflect settlements that are carried out by such a credit institution on behalf of and at the expense of the bank.

The basis for the operation of the correspondent account is the corresponding correspondent agreement, which is concluded between the interested credit institutions.

Such a contract specifies the forms of settlements, the order of information interaction and the account regime, the duties and rights of each party, the liability and sanctions for breach of contractual obligations, the conditions for obtaining a commission for the use of a correspondent account, compensation for telegraphic, postal and other expenses, duration and mechanism Its early termination, etc.

Correspondent bank account can be one of several types:

• NOSTRO. This correspondent account is addressed to the respondent bank (the manager), which is opened in the correspondent bank and is reflected in the composition of the asset of the balance of the first.

• LORO. This is the current account, which is opened by the correspondent bank to its respondent bank and is reflected in the passive of its balance sheet. Correspondent account of LORO in one institution is at the same time a NOSTRO account in a correspondent bank.

• BEAUTIFUL. This is the account of a foreign bank in a resident bank, which opens either in local currency or in the currency of a third country. In other words, this is the same LORO account, only it refers to a foreign correspondent bank.

Correspondent account of the bank in its economic essence is a type of deposit account on demand. In its functions it resembles the settlement account of the organization, but taking into account the peculiarities of banking activity.

On these accounts, commercial banks store both attracted and own funds, which are temporarily vacant at the moment. The correspondent account reflects a fairly wide range of transactions.

Firstly, it is the implementation of operations for cash, credit and other services to clients of the bank. This includes the collection and transfer of money in connection with the purchase and sale of various services and goods, as well as the payment of taxes, duties, levies that are made in favor of the budget, insurance companies, extrabudgetary funds, etc.

A certain part of operations is connected with the receipt and issuance of cash to the clientele for administrative and economic needs and for issuing bonuses and wages to employees. Also on the correspondent account are transactions related to the acquisition or sale of securities or currency, the transfer of reserve requirements, as well as transactions on interbank deposits and loans. In addition, the correspondent account serves to reflect the business operations of the bank itself, for example, for administrative expenses, payments to the budget. Also for various off-budget funds, etc.

After the signing of the correspondent agreement between the two banks, in each of them a correspondent account is opened, on which a certain amount of money is placed. Upon receipt by the first bank of the payment order of the client for the transfer of the money amount to the counterparty's account in the correspondent bank, it writes off the corresponding amount from the client's account and transfers it to the correspondent account of the second bank. And the second bank makes the transfer of the amount from the respondent bank account to the account of the final recipient of funds.

Usually, the amounts on NOSTRO and LORO accounts that are opened according to the correspondent agreement of the two banks remain comparable for a long time, since payments often go "halfway". However, this does not mean that with the formation of a significant difference between the amounts on the accounts, one bank starts crediting the other for free. Such an imbalance is equalized by means of a correspondent account in the RCC.