The determinants of correspondent banking relationships: A case of Vietnam

This paper investigates the driving forces of decision-making on correspondent banking relationships (CBRs), focusing on two decisions: whether to establish a correspondent bank (CB) in a country, which we refer to as country selection, and then how many CBs are established in each country, which we label as the number decision. Based on cross-sectional data of commercial banks in Vietnam, the Probit method was applied for the country selection, and the Ordinary Least Squares (OLS) method was applied for the number decision. The main findings of this study are as follows: bilateral trade has a positive effect while distance has a negative impact on both decisions; a high gross domestic product per capita (GDP) increases the possibility of a country being selected while the presence of a financial center only affects the number of CBs; the effects of components of trade flow, bank concentration and anti-money laundering (AML) are mixed. When taking into account the censored property of CB data, the effects of total trade, distance, financial center, and AML on the number decision are robust, whereas those of trade components and GDP are not. These findings suggest that the bilateral connection between countries is the main determinant of CBRs.