Correspondent Banking: Part 2

Correspondent banking in the context of cross-border payments for both current account and financial account transactions are first unpacked in this chapter. This is proceeded by a discussion of some of the contemporary issues that currently preside in the cross-border payment sphere. As it is a widely adopted yardstick, the chapter then investigates whether a nation’s external sustainability can be surveyed by examining its net international investment position (NIIP). On the basis that financial account transactions are larger than current account transactions in terms of both volume and value, three motivations are presented to suggest that the notion of external sustainability can be decoupled from the NIIP, namely that while a nation may in theory be a net creditor vis-à-vis the rest of the world in accordance with its NIIP, in reality its susceptibility to succumbing to the universal challenge may be larger than an economy which is a net debtor as a consequence of (1) stock or (2) flow effects. Moreover, it is argued that should the domestic economy succumb to the universal challenge as a result of either stock or flow effects, (3) this may not translate into changes to NIIP, thereby masking the fact that even though the domestic economy has succumbed to balance of payments difficulties, it continues to appear as a net creditor.