What is a correspondent bank?

A correspondent bank is defined as a financial institution that accepts deposits and performs banking services for other banks, particularly in international transactions. This role is essential in the global banking system, as it allows smaller or less established banks to provide their clients with access to foreign financial markets and services without having to establish a physical presence in those markets themselves.

Through correspondent banking relationships, institutions can facilitate wire transfers, settlement of international transactions, foreign exchange, and other banking services. This is crucial for businesses and individuals engaging in cross-border trade and finance, as it effectively connects them to a wider global network.

In essence, the correspondent bank acts as an intermediary, bridging gaps between financial institutions that might not otherwise be able to transact directly. This arrangement is vital for enhancing liquidity and providing broader access to banking services internationally.