What Are Deposits Between Banks?
If two banks agree that one will hold money in an account for the other, this is called an interbank deposit. As part of the interbank deposit agreement, the bank that holds the deposit has to open a due account for the other bank. This account in the general ledger has money owed to someone else. So that everything works out, the correspondent bank is the one that waits for the payment.
How to Understand Interbank Deposits
There is a market for savings between banks. The interbank market allows banks and other financial firms to buy and sell currencies. Retail investors (people who buy and sell securities for their account instead of for another business or organization) and other smaller traders are not included in this system.
Most of the dealing between banks on the market is proprietary, which means that banks trade with and for each other. However, these deals are sometimes made for huge institutional customers.
Banks borrow and give money to each other on the interbank market to keep their cash on hand and meet the reserve requirements set by regulators. This is the amount of money a bank must keep in its safe. There are many kinds of deals that banks make with each other that help them meet these standards. These include loans and deposits. These trades also have a lot of liquidity in the market.
When two banks agree to make an interbank deposit, the keeping bank sets up a due account for the other bank, which is the one that makes the deposit. The due-to account is used to hold money and is called a payment account.
Small retail investors and other small traders are not included in the interbank scheme.
Banks charge different rates of interest on short-term loans and savings. The name for this rate is the “interbank rate.” The interbank rate is based on the loans’ maturity, the market’s state, and the banks’ credit ratings. Big banks are the only ones who can get these rates, the lowest you can find at any given time.
What does correspondent banking mean?
The bank that holds the due account is called the “corresponding bank,” as we already said. This name is usually given to payments between banks in the same country. However, the rules change if the partner bank is not in the same country.
As you can see, this is a nostro account, which comes from the Latin word “ours” and refers to the bank holding the cash. In simple terms, this is a foreign currency account that a bank holds at another bank. The Latin word for “yours” means “vostro,” which is different. When another company has an account with them in their home currency, the bank calls it a “vostro account.” What will the correspondent bank call its account at the holding bank? The holding bank will call it a Vostro account.
Let me show you an example to help you understand. In this case, Bank A makes an account with Bank B, which is in a different country. Bank A’s account is called a nostro account, which means “our account on your ledger.” For Bank B, it’s called a Vostro account, which means “your account.”
Why do banks lend and deposit money with each other?
Banks can borrow money from each other to ensure they have enough cash for their current needs. When they have extra cash on hand, banks can lend or deposit it. The loans between banks are only good for a short time, usually just one night or once a week.
What’s the Difference Between an ACH Deposit and Any Other Deposit?
Both businesses and people in retail banking use ACH (automated clearinghouse) transfers. Before they are completed, they are checked by an interbank system. Accounts made between banks are called interbank accounts.
What Is a Due To Account in Deposits Between Banks?
When two banks agree to make an interbank deposit, the bank that holds the deposit sets up a due account for the bank making the deposit. This bank is called the matching bank. The due-to account is used to hold money and is called a payment account.
Conclusion
- An interbank deposit is a deal between two banks where one holds money in an account for the other.
- As part of the deal, the owning bank has to set up a due-to account for the other bank.
- Most of the selling between banks on the market is proprietary, which means that banks only trade with and for each other.