What is the definition of correspondent banking?

What is the definition of correspondent banking?

• A. The lending of funds between two banks for cross-border projects.
• B. The provision of banking services by one bank to another bank to facilitate international transactions in jurisdictions where they have no physical presence.
• C. A retail customer opening an account with a foreign bank.
• D. A domestic interbank clearing agreement for domestic payments.

Answer: (B)

Correspondent banking is when one bank provides services to another bank to facilitate international transactions in places where the second bank has no local presence. This arrangement lets customers of the first bank send and receive payments, access foreign exchange, and conduct other cross-border banking activities through the correspondent bank. It often involves the banks maintaining reciprocal accounts to settle transfers (nostro/vostro) and enables activity across borders without each bank needing a physical branch in every country. This concept is central to how international payments move, and it also brings heightened AML and compliance considerations, since cross-border flows require careful customer due diligence, sanctions checks, and ongoing monitoring. The other options describe lending between banks, retail account opening with a foreign bank, or domestic interbank clearing, which do not capture the cross-border, service-based relationship defined here.

Correspondent banking is when one bank provides services to another bank to facilitate international transactions in places where the second bank has no local presence. This arrangement lets customers of the first bank send and receive payments, access foreign exchange, and conduct other cross-border banking activities through the correspondent bank. It often involves the banks maintaining reciprocal accounts to settle transfers (nostro/vostro) and enables activity across borders without each bank needing a physical branch in every country. This concept is central to how international payments move, and it also brings heightened AML and compliance considerations, since cross-border flows require careful customer due diligence, sanctions checks, and ongoing monitoring. The other options describe lending between banks, retail account opening with a foreign bank, or domestic interbank clearing, which do not capture the cross-border, service-based relationship defined here.