Correspondent Banking and Eurodollar Transactions. Read the following news artic
ID: 1169070 • Letter: C
Question
Correspondent Banking and Eurodollar Transactions. Read the following news article, which outlines a recently announced banking relationship that will allow financial transactions to take place between individuals and firms in U.S. and Cuba: http://www.miamiherald.com/news/business/article28072318.html
a. Using T-accounts (showing changes in assets and liabilities), show the transactions that would take place if a U.S. firm (which has an account at Stonegate Bank) pays a Cuban firm (which has an account at Banco Internacional de Comercio); assume the payment is made in U.S. dollars (there should be no foreign currencies involved in any part oy this question.). Hint: you should show the transactions using four T-accounts.
b. Now suppose that the U.S. firm from part (a) doesn’t have an account at Stonegate Bank, but instead has accounts at both Bank of America in New York and Banco Internacional de Comercio in Cuba. Using T-accounts, show the transactions that would take place if the U.S. firm transfers U.S. dollars from their account at Bank of America to their account at Banco Internacional de Comercio. Assume that Bank of America and Stonegate Bank are both parts of the Federal Reserve System. Hint: you should show the transactions using five T-accounts.
c. Explain why, during the transaction you described in part (b), dollars never actually left the U.S. banking system.
Explanation / Answer
Corresponding Accounting is a special arrangement between banks of two countries. It will provide oportunity to pay or receive in foreign currencies without transfer of currecy between two countries. This arrangement is made by an agreement between two banks. It will allow them to deal with foreig currency without physical transfer of foresign currency.
Thus arrangemet has been established recently between USa and Cuban bank on establishmet of diplomatic relation among these two countries in the year 2015. Before this reestablishment of relation, cuba was considered as a politically disturbed country, and no such political relation was there.
Now this agreement of corresponding banking has been made between Stonegate bank of USA and Banko internacional de Comercio bank of Cuba. Under this arrangement Stonegate has been allowed to open a correspondence account in Cuban bank. It will enable Stonegate bank to transact on USD and Cuban currency without physical transfer of foreiogn currency.
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Answer of part (a):
Suppose there is a USA firm. It wants to transfer some dollar to a Cuban firm for making payment against some purchase. Following entries will be made in the correspondence banking arrangement.
1. First you should transfer money in USD from firm account maintained at Stonegate Bank to correspondent account. The Journal will be:
US Firm account at Stonegate Bank ................................... Debit Amount in USD
Correspondent account of Stnegate in Banko, Cuba.........Credit Amount in USD
2. Then Stonegate bank will send message to Banco Cuba to transfer equivalent Cuban currency in Cuban firm's account. After getting this advice Banco Internacional de comercio will pass following Journal etry.
Correspondent Account of Stonegate Bank USA..................... Debit Amount in cuban currency
Cuban Firm's account at Banco Bank..............................Crediy amount in cuban currency
Thus after this transaction, there will be decerase in deposit of money form correspondent account in cuban currency. At the same time there will be equivalent increae in dollar deposit in the same account. Thus ultimate balance of correspondent account will balance.
These transactions are shown in following T accounts
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Answer of part (b):
Now the situation has changed. US firm has no account with Stonegate Bank. It is maintaining Account with Bank of America. But Bank of America has no such correspondent account with Cuban bank. So Bank of America will transfer the amount from Firm's account to Stonegate via clearence account maintained by these two banks. Then transfer of payment through correspondent banking arrangement will take place. Journal entries her will be as follows:
1. First Bank of America will transfer dollar value from firms account to its clearing account maintained with Federal reserve system. Journal is:
US firm Account .................................................. Debit Dollar value
Clearence account of American Bank.................. Credit Dollar bank
2. Then clearing cell of federal reserve system will transfer this amount from clearence account og Bank of America to clearence acount of Stinegate Bank. Journal entry is:
Clearence account of Bank of America......................Debit Dollar value
Clearence account of Stonegate Bank..................Credit dollar value
3. Now Stonegate bank will transfer this amount from clearence account to correspondence account. Journal is:
Clearence account of Syonegate Bank.......................Debit Dollar value
Correspondent account at Banco Bank Cuba..............Credit Dollar value
4. Finally Stonegate will advice Banco, Cuba to transfer the equivalent cuban currency from its correspondent account to Cuban firms Account. Journal is:
Correspondent Account of Stonegate Bank, USA.........Debit Cuban value
Cuban Firms Account...........................................Credit Cuban value.
Thus T accounts are as follows:
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answer of Part (c)
In part (b) the dollar value is transferred to Stonegate Bank by Bankl of America through Ferderal Reserve clearence mechanism. Then the amount is credited to Correspondent account of Stonegate. Finally it is transferred to Cuban firms account through correspondent account on the basis of instruction from Stonegate bank. Thus there is no physical transfer of foreign currency. Matter has been settled through book adjustments.
Maintained at Stonegate Bank USA US Firm's Account Correspondent account at Banco bank Cuba Dollar value Correspondent Account in Banco bank By US Firm's Account Dollar value Maintained by Banco Bank of Cuba Cuban Firm's Account Correspondent account of Stoneagate Bank, USA Cuban currency Correspondent Accout of Stonegate Bank USA Cuban firms account Cuban currency