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This is one of those posts where I found very little substance compared to its length. And I didn’t really come out of it with a better understanding of moving

by AnonHP 5y ago

This is one of those posts where I found very little substance compared to its length. And I didn’t really come out of it with a better understanding of moving money either (as to how correspondent banks ultimately settle the debts, which in turn becomes how countries settle their debts, etc.). I would’ve appreciated more nuance and information on that, even though it’s a vast topic. To simplify heavily, is SWIFT just an accepted and legal alternative to the hawala system?

LittleNemoInS 5y ago
> To simplify heavily, is SWIFT just an accepted and legal alternative to the hawala system? No. To simplify heavily, Swift is the network on which the hawala system runs. To transfer cash from a bank to another bank, one can : * call the other bank * send an email * send a letter * send a swift message Since transfering cash is not as simple as it seems (trust is the key), using an established network with clear fields and backups is a good choice. Thus Swift.
- joshspankit 5y ago
  Another important point in the article is that cash is typically not transferred, but instead (basically) “your account at my bank is credited equal to the amount that you debit from my account at your bank”
  - LittleNemoInS 5y ago
    Yes. If I want to wire you some cash from bank A to bank B, my bank (A) will debit my account,and credit their account (called a nostro). There, we have two possibilities : * The two banks are connected (meaning B has an account in A), A will debit their nostro and credit the account of B in A (called a loro) and inform bank B via swift. B will debit the account of A in B, credit their nostro, debit their nostro and credit your account * The two banks are not directly connected : A will debit my account and credit their nostro. They will then debit their nostro and credit the account of a third institution (another bank or a clearing house). They will send a message to the bank B and the third institution, telling them that the cash should be credited to you. If the bank B and the third institution are connected, see above. If not, the process goes on, until the cash "reaches" bank B. This is highly simplified, but it's the principle.
    - jaclaz 5y ago
      Should be nostro and vostro (our and your) not loro (their): https://en.wikipedia.org/wiki/Nostro_and_vostro_accounts https://en.wikipedia.org/wiki/Nostro_and_vostro_accounts the loro is used when a third bank is in the process or however is not as common as the two above.
      - LittleNemoInS 5y ago
        You are right, sorry for the confusion. (However, the WP article is not really accurate, nostro accounts can also be our money in our system)
        jaclaz 5y ago
        No need to be sorry, but yes, Wikipedia articles can be a bit "vague" sometimes, it was just the first reference I found, maybe this one on investopedia is better, though it is also seemingly putting an accent on foreign currency/foreign banks, which I don't believe is the only use (I mean the concept applies to banks in a same country as well, AFAICR): https://www.investopedia.com/ask/answers/051815/what-difference-between-nostro-and-vostro-account.asp https://www.investopedia.com/ask/answers/051815/what-differe...
        LittleNemoInS 5y ago
        Yes, the concept applies to all bank accounts. As I said, Nostro is also used for own accounts. The account refleting the position of the bank (its own money and assets, not the money or assets deposited by its clients) is also called a nostro, at least in Europe.
patio11 5y ago
Merchant banking was indeed quite similar to hawala, and came out of very similar needs. Correspondent banking is an outgrowth of merchant banking, and essentially allows trust chains to expand. SWIFT is a messaging system which those trust chains use to communicate. (Simplified because on phone, etc.)
- fmajid 5y ago
  The messaging system is orthogonal to the trust relationship between banks in different countries. In the old days, this trust came from family bonds, e.g. the various arms of the Fuggers or the Rothschilds. Nowadays, it's... more complicated. The US government spent billions on making foreign banks like BNP Paribas whole on contracts they had with AIG because it could not bail Goldman Sachs without also bailing them out, at least not without destroying the basis of trust in the international financial system. That's the part where compliance, risk management and AML-KYC intervenes, along with government employees installed directly inside the key banks to monitor it.
- htrp 5y ago
  swift is literally the TCP/IP of global finance
helsinkiandrew 5y ago
> how correspondent banks ultimately settle the debts, which in turn becomes how countries settle their debts. Ultimately the debts and credits either cancel out, or when there is a flow from one country to another - the creditor countries ends up holding them as foreign currency reserves (in $ in bank accounts) or converts them into treasury bonds, gold or other investments - that may or not be transferable from one country to another. This tweet lists Russia's foreign reserves: https://twitter.com/heimbergecon/status/1497513211129597952 https://twitter.com/heimbergecon/status/1497513211129597952

by AnonHP 5y ago

LittleNemoInS 5y ago

> To simplify heavily, is SWIFT just an accepted and legal alternative to the hawala system? No. To simplify heavily, Swift is the network on which the hawala system runs. To transfer cash from a bank to another bank, one can : * call the other bank * send an email * send a letter * send a swift message Since transfering cash is not as simple as it seems (trust is the key), using an established network with clear fields and backups is a good choice. Thus Swift.

joshspankit 5y ago
Another important point in the article is that cash is typically not transferred, but instead (basically) “your account at my bank is credited equal to the amount that you debit from my account at your bank”
- LittleNemoInS 5y ago
  Yes. If I want to wire you some cash from bank A to bank B, my bank (A) will debit my account,and credit their account (called a nostro). There, we have two possibilities : * The two banks are connected (meaning B has an account in A), A will debit their nostro and credit the account of B in A (called a loro) and inform bank B via swift. B will debit the account of A in B, credit their nostro, debit their nostro and credit your account * The two banks are not directly connected : A will debit my account and credit their nostro. They will then debit their nostro and credit the account of a third institution (another bank or a clearing house). They will send a message to the bank B and the third institution, telling them that the cash should be credited to you. If the bank B and the third institution are connected, see above. If not, the process goes on, until the cash "reaches" bank B. This is highly simplified, but it's the principle.
  - jaclaz 5y ago
    Should be nostro and vostro (our and your) not loro (their): https://en.wikipedia.org/wiki/Nostro_and_vostro_accounts https://en.wikipedia.org/wiki/Nostro_and_vostro_accounts the loro is used when a third bank is in the process or however is not as common as the two above.
    - LittleNemoInS 5y ago
      You are right, sorry for the confusion. (However, the WP article is not really accurate, nostro accounts can also be our money in our system)
      - jaclaz 5y ago
        No need to be sorry, but yes, Wikipedia articles can be a bit "vague" sometimes, it was just the first reference I found, maybe this one on investopedia is better, though it is also seemingly putting an accent on foreign currency/foreign banks, which I don't believe is the only use (I mean the concept applies to banks in a same country as well, AFAICR): https://www.investopedia.com/ask/answers/051815/what-difference-between-nostro-and-vostro-account.asp https://www.investopedia.com/ask/answers/051815/what-differe...
        LittleNemoInS 5y ago
        Yes, the concept applies to all bank accounts. As I said, Nostro is also used for own accounts. The account refleting the position of the bank (its own money and assets, not the money or assets deposited by its clients) is also called a nostro, at least in Europe.

patio11 5y ago

Merchant banking was indeed quite similar to hawala, and came out of very similar needs. Correspondent banking is an outgrowth of merchant banking, and essentially allows trust chains to expand. SWIFT is a messaging system which those trust chains use to communicate. (Simplified because on phone, etc.)

fmajid 5y ago
The messaging system is orthogonal to the trust relationship between banks in different countries. In the old days, this trust came from family bonds, e.g. the various arms of the Fuggers or the Rothschilds. Nowadays, it's... more complicated. The US government spent billions on making foreign banks like BNP Paribas whole on contracts they had with AIG because it could not bail Goldman Sachs without also bailing them out, at least not without destroying the basis of trust in the international financial system. That's the part where compliance, risk management and AML-KYC intervenes, along with government employees installed directly inside the key banks to monitor it.
htrp 5y ago
swift is literally the TCP/IP of global finance

helsinkiandrew 5y ago

> how correspondent banks ultimately settle the debts, which in turn becomes how countries settle their debts. Ultimately the debts and credits either cancel out, or when there is a flow from one country to another - the creditor countries ends up holding them as foreign currency reserves (in $ in bank accounts) or converts them into treasury bonds, gold or other investments - that may or not be transferable from one country to another. This tweet lists Russia's foreign reserves: https://twitter.com/heimbergecon/status/1497513211129597952 https://twitter.com/heimbergecon/status/1497513211129597952