Thursday, April 30, 2009

correspondent balances of commercial bank

correspondent balances also are a form of primary reserves, or cash, of commercial banks. A city correspondent requires its country correspondent to maintain a balance sufficient to cover the cost of services that are furnished to the country correspondent. Despite these services, however, it is always in the interest of the country bank to keep its city correspondent balances as low as possible. These correspondent balances sometimes get so low in relation to the cost of the services being performed that the city bank finds it necessary to encourage the country bank to maintain a balance somewhat larger than it has been running. if the account continues to be unprofitable, the city correspondent may even terminate the relationship, though such extreme action is unlikely. Correspondent accounts normally yield a comfortable profit for the city bank. Indeed, the likelihood of profit from such accounts leads most large city banks to seek out actively correspondent deposit business.

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