7

In a fiat currency if I do an electronic transfer for US$200,000 from say a Bank of America current account to Citibank how do the banks account for/handle the transfer?

Are we just relying on trust that if recipient bank Citibank increases its asset book and liability book by US$200,000 then the sending bank reduces its asset list and liability list by US$200,000?

If that's the case, who audits the banks to ensure that all the books balance and we haven't created too much money (outside of frictional reserve limit/allowances)?

3

If you are looking at domestic transfers, all Banks hold accounts with the Central Bank [Reserve Bank] , in US the Central Bank is called Federal Reserve. The money from account of Bank of America held with Fed is debited and the account of Citi held with Fed is credited.

  • So taking information from the post below. The fed act as a correspondent bank for the parties involved? – matt f May 11 '11 at 12:36
  • Not exactly. Correspondant Bank is a regular bank with whom you have relation and are used to make payments on behalf of. The Fed is Bank of Banks. Its more like lets say I and you both hold accounts with Bank of America. If I transfer money to you, Bank of America just debits my account and credits your account. Similarly all Banks hold accounts with Fed. One Bank's account is debited and other Banks account is credited. – Dheer May 11 '11 at 13:42
  • So when would one (a sending/receiving bank) use a correspondence bank? if all banks have accounts with the Fed then there should never be a need for a correspondence bank during a domestic transfer? – matt f May 12 '11 at 4:13
  • In the US for domestic transfers by and large there would be no correspondant bank. However lets say there is a credit union or a Non US Bank with a branch in US; it is not participating in clearing, in this case, the Credit union or Non US Bank will need a correspondant Bank in US who would credit funds. – Dheer May 12 '11 at 6:24
  • Thanks Dheer. Does it work like this in other countries too or is using the Fed unique to the US? So in the UK they would use the Bank of England etc.. ? – matt f May 12 '11 at 8:51
5

From http://en.wikipedia.org/wiki/Wire_transfer:

  1. The entity wishing to do a transfer approaches a bank and gives the bank the order to transfer a certain amount of money. IBAN and BIC codes are given as well so the bank knows where the money needs to be sent.

  2. The sending bank transmits a message, via a secure system (such as SWIFT or Fedwire), to the receiving bank, requesting that it effect payment according to the instructions given. The message also includes settlement instructions. The actual transfer is not instantaneous: funds may take several hours or even days to move from the sender's account to the receiver's account.

  3. Either the banks involved must hold a reciprocal account with each other, or the payment must be sent to a bank with such an account, a correspondent bank, for further benefit to the ultimate recipient.

  4. Banks collect payment for the service from the sender as well as from the recipient. The sending bank typically collects a fee separate from the funds being transferred, while the receiving bank and intermediate banks through which the transfer travels deduct fees from the money being transferred so that the recipient receives less than what the sender sent.

The last point may not be relevant in domestic transfers.

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