Introduction

Correspondent banking refers to business relationships between banks which are particularly popular as a means of facilitating foreign trade, eg for settling payment transactions and documentary collections, the encashment of foreign securities or foreign exchange trading. Such business is frequently conducted in the form of individualised transactions which cannot be processed using payment or securities settlement systems, inter alia because they are specifically tailored to meet customer requirements. In most instances, the prerequisite for conducting transactions of this kind is that all the correspondent banks hold accounts with one another. Where bank A (in a given country) operates an account on behalf of a (foreign) bank B, this is referred to as a loro account. The matching account on bank B's books is described as the nostro account.

In Germany, correspondent banking is also of great importance to domestic payment transactions. Within the sector of savings banks and credit cooperatives, payments are initially settled within the respective sector via correspondent bank accounts held at the respective central institutions. In Germany another very widely used feature of correspondent banking is the feature to access payment systems as an indirect participants of large institutions. .This enables indirect participants to benefit from cost savings arising from economies of scale and to avoid paying fixed participation fees.

Implementation

Although the correspondent banking network is not in itself a financial market infrastructure, the Bundesbank's payments oversight team does track developments in this area as turnover substantial.
As part of the regular Eurosystem survey on correspondent banking in euro, the Bundesbank selects a number of significant banks which are then asked to complete a survey containing quantitative and qualitative questions. The answers are subsequently evaluated by the Bundesbank, which then arranges meetings to clarify any ambiguities and to gain insights into the causes of and other factors relevant to noticeable deviations from past survey results as well as the respondent banks' comments on future trends and planned changes. Germany's feedback is incorporated into the Eurosystem survey in anonymised form, and the final report on these overall results is published on the internet.