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The role of trust in banking:

In the current banking system, there are two types of trust involved. Trust in the asset and trust in the counterparty.

Fiat currencies are not backed by collateral. When a bank holds Fiat, it places trust in the govt. and CB that issued it.
This means a bank would be happy to hold $USD or $EUR,but less inclined to hold a volatile currency like the Zimbabwe Dollar or the Bolivar. his is problematic because this adversely affects daily banking services locally&internationally for people and entities in these countries
Similarly, when Bank A sends a payment to Bank B, the latter has to trust that the former will honor the settlement. There is always a risk that they won't, and this is called counterparty risk. This is the reason why the correspondent banking system is in place.
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