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 accounts
 To explain the operations of Nostro
and Vostro accounts
 To explore the future development in
international banking
International Banking
International banking is the cross-border
extension of a bank’s 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.
International Banking
 Knowledge advantage – The foreign
subsidiary can draw on the parent bank’s
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.
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 traveller’s cheques, remittance and
foreign exchange.
Types of international banking
presence




Correspondent banks
Representative offices
Foreign branches
Subsidiary and affiliate banks
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 other’s interbank account.
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.
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.
Operations of Nostro and Vostro
accounts
 Hang Seng Bank’s sterling pound
account with Midland Bank has a
credit balance of £100,000. Midland
Bank’s Hong Kong dollar account with
Hang Seng Bank has a credit balance
of $900,000.
Operations of Nostro and Vostro
accounts
Hang Seng Bank’s Ledger
Due to Midland Bank Account
Balance b/f
$900,000
Due from Midland Bank Account
Balance b/f
£100,000
Operations of Nostro and Vostro
accounts
Midland Bank’s Ledger
Due to Hang Seng Bank Account
Balance b/f
£100,000
Due from Hang Seng Bank Account
Balance b/f
$900,000
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
HK$300,000 to XYZ Company which is a
customer of Hang Seng Bank.
Operations of Nostro and Vostro
accounts
Hang Seng Bank’s Ledger
Due to Midland Bank Account
XYZ Company
$300,000
Balance b/f
$900,000
Due from Midland Bank Account
Balance b/f
£100,000 Mr. Wong Account
£20,000
Operations of Nostro and Vostro
accounts
Hang Seng Bank’s Ledger
Mr. Wong Account
Due from Midland
Bank
£20,000
Balance b/f
£50,000
XYZ Company Account
Due to Midland
Bank
$300,000
Operations of Nostro and Vostro
accounts
Midland Bank’s Ledger
Due to Hang Seng Bank Account
Miss Wong
£20,000
Balance b/f
£100,000
Due from Hang Seng Bank Account
Balance b/f
$900,000
ABC Company
$300,000
Operations of Nostro and Vostro
accounts
Midland Bank’s 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
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.
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 subaccounts. Secondly, receipts and payments are
segregated for high volume corporate customers to
facilitate reconciliation. Then the bank’s treasury
department can also benefit from increased foreign
currency deposits.
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 bank’s cut-off times for
different currencies.
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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