Definition
The term depository bank refers to a financial institution that provides for the transfer of securities and agency services as part of a depository receipt program. While these institutions typically hold securities in electronic form, they can also hold physical certificates.
Explanation
A depository receipt is a financial instrument that represents a foreign company's securities. Depository banks hold the shares of stock or bonds, typically in the form of an American depository receipt (ADR) and act as a custodian of those receipts. Depository receipts allow investors to purchase the securities of a foreign company less expensively. Since ADRs are traded on the American Stock Exchange, NYSE, and NASDAQ, they're also more convenient than purchasing securities on a foreign exchange.
Also known as depository institutions, depository banks provide all of the necessary transfers of securities in connection with a depository receipt program. In addition to issuing receipts (which are the equivalent of the security), they also maintain records of all transactions and, if the investor elects, they will distribute dividends in the owner's domestic currency.
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