A correspondent account is a type of account that a bank opens in another credit institution or in a unit of the Central Bank in order to reflect the settlements that are carried out by such a credit institution on behalf of and at the expense of the bank.
The basis for transactions on the correspondent account is the corresponding correspondent agreement, which is concluded between interested credit organizations.
Such an agreement shall indicate the forms of settlements, the procedure for information interaction and the account regime, obligations and rights of each of the parties, responsibility and sanctions for violation of contractual obligations, conditions for receiving a commission for using a correspondent account, compensation for telegraph, postal and other expenses, validity period and mechanism its early termination, etc.
The bank's correspondent account can be one of several types:
- NOSTRO. This is a correspondent account in the name of the respondent bank (manager), which is opened in the correspondent bank and is reflected in the asset balance sheet of the first.
- LORO. This is a current account that is opened by a correspondent bank to its respondent bank and is reflected in the liability of its balance sheet. The LORO correspondent account in one institution is at the same time the NOSTRO account in the correspondent bank.
- EVERYTHING. This is a foreign bank account with a resident bank, which is opened either in local currency or the currency of a third country. In other words, this is the same LORO account, only it refers to a foreign correspondent bank.
The bank's correspondent account in its economic essence is a type of demand deposit . In its functions, it resembles the account of the organization, but taking into account the particularities of banking.
On such accounts, commercial banks store both attracted and own funds, which are temporarily free at the moment. The correspondent account reflects a fairly wide range of operations.
Firstly, this is the implementation of operations on cash, credit settlement and other customer services of the bank itself. This includes the collection and transfer of money in connection with the sale of various services and goods, as well as the payment of taxes, duties, fees, which are made in favor of the budget, insurance companies, off-budget funds, etc.
A certain part of the operations is related to the reception and distribution of cash to the clientele for administrative and business needs and for the payment of bonuses and wages to employees. Also, transactions related to the purchase or sale of securities or currency, transfer of reserve requirements, as well as operations on interbank deposits and loans are reflected in the correspondent account. In addition, the correspondent account serves to reflect the business operations of the bank itself, for example, for management expenses, payments to the budget. Also for various extrabudgetary funds, etc.
After signing the correspondent agreement between the two banks, a correspondent account is opened in each of them, on which a certain amount of money is placed. Upon receipt by the first bank of the client's payment order to transfer the amount of money to the counterparty’s account with the correspondent bank, he debits the corresponding amount from the client’s account and transfers it to the second bank’s correspondent account. And the second bank transfers the amount from the account of the respondent bank to the account of the final recipient of the funds.
Usually, the amounts on NOSTRO and LORO accounts, which are opened according to the correspondent agreement of two banks, remain comparable for a long time, since payments often go “towards”. However, this does not mean that if a significant difference is formed between the amounts in the accounts, one bank starts lending to another for free. This imbalance is cleared with the help of a correspondent account in the RCC.