Domestic banks are banks that are incorporated, licensed and headquartered in the country where they do business, and are usually controlled by residents of that country or its government. They take local deposits, lend to local households and companies, hold accounts at the national central bank and connect the domestic payment system to the rest of the world. In most countries they hold the bulk of banking assets.
The term is used mainly in contrast with foreign banks: institutions headquartered abroad that operate locally through a branch, which is part of the foreign parent, or a subsidiary, which is a separately licensed local company owned by the parent. Statistical agencies sometimes classify a locally incorporated, foreign-owned subsidiary as a foreign bank by ownership but a domestic institution by residence, so the exact line depends on the purpose of the data.
Domestic banks in plain terms
Think of the shops on a high street. Some are family businesses that started in the town and answer only to local owners; others are outlets of international chains whose head office is on another continent. Both sell to the same customers, but they follow different decisions and draw on different resources when times are hard.
Banks are similar. A domestic bank's head office, board and capital are at home, and its fortunes rise and fall with the local economy. A foreign bank's local office can call on its parent for money and expertise, but can also be shrunk or closed by a decision taken far away. Countries usually want a mix of both, and they regulate each slightly differently.
Domestic versus foreign banks
| Feature | Domestic bank | Foreign branch | Foreign subsidiary |
|---|---|---|---|
| Legal entity | Local company | Part of the foreign parent | Local company owned by the parent |
| Main supervisor | Home regulator | Parent's home regulator, with local oversight | Host-country regulator |
| Capital | Held locally | Usually held by the parent | Held locally |
| Local deposit insurance | Normally covered | Varies by country | Normally covered |
Domestic banks are typically covered by the national deposit insurance scheme and supervised under rules derived from Basel III. The largest may be designated domestic systemically important banks and required to hold extra capital. Starting one requires a full banking licence, and once licensed it can usually open an account at the central bank and take part in the national real-time gross settlement (RTGS) system.
Role in payments and money creation
Most money in a modern economy is commercial bank money: deposits created when banks lend. Domestic banks create much of that money, settle payments between themselves using reserves at the central bank, and often act as a settlement bank for card schemes, payment institutions and smaller lenders that lack direct access. In many emerging markets, state-owned domestic banks also carry public policy roles, such as lending to farmers or financing infrastructure.
Domestic banks and correspondent access
A domestic bank in a small or emerging economy usually cannot pay in US dollars, euros or other foreign currencies by itself. It relies on a correspondent bank abroad that holds an account for it, known from the domestic bank's side as a nostro account. Through such a correspondent banking relationship, the domestic bank can wire money for importers, receive export proceeds and remittances, and obtain dollar funding.
This dependence leaves domestic banks exposed to de-risking, the withdrawal of correspondent services by large global banks that judge a relationship too costly or risky. Data from the BIS Committee on Payments and Market Infrastructures show that the number of active correspondent relationships worldwide fell by about a quarter between 2011 and 2020, with small island states and parts of Africa and the Caribbean among the hardest hit. When a domestic bank loses its last dollar correspondent, local firms may struggle to trade internationally at all.
Global banks often refuse to serve a domestic bank that lets its own customers use the relationship indirectly, a practice known as a nested account, unless it can show strong anti-money-laundering controls. Domestic banks therefore invest heavily in compliance to keep their correspondents, and some countries and firms look for ways of bypassing correspondent banking altogether.
Policy debates
Governments weigh the benefits of foreign bank entry, such as capital, competition and know-how, against the risk that foreign banks cut lending at home when their parent is under stress, as happened in parts of central and eastern Europe during the 2008 global financial crisis. In response, international lenders and regulators agreed the Vienna Initiative in 2009, under which large parent banks committed to keep their subsidiaries in the region capitalised and funded. Some countries cap foreign ownership or require foreign banks to operate as subsidiaries rather than branches so that local capital stays in the country. Domestic banks, for their part, can be weakened by close ties to the state, concentrated lending to connected companies or a heavy exposure to government bonds, which links their health to that of the sovereign.