Nostro Accounts Explained: A Comprehensive Guide

A Nostro account is a bank account that a bank holds with a foreign bank in the currency of the country where the funds are held. The term “nostro” is a Latin word that means “ours,” and it is used to facilitate foreign exchangeForeign ExchangeForeign exchange (Forex or FX) is the conversion of one currency into another at a specific rate known as the foreign exchange rate. The conversion rates for almost all currencies are constantly floating as they are driven by the market forces of supply and demand. and international trade transactions involving foreign currencies. It is the opposite of the term “vostro,” which is a Latin word for “yours.”

Summary

• A Nostro account is a bank account that a bank holds with a foreign bank in the domestic currency of the country where the funds are held.
• It is used to facilitate the settlement of international trade and foreign exchange transactions.
• The account is mainly held by banks or large corporations that regularly engage in international trade transactions.

Understanding Vostro Accounts

A Vostro account is a bank account that other foreign banks hold with “our” bank in the domestic currency. Both types of accounts are used to differentiate the different types of accounts that banks hold for other banks.

Nostro accounts are usually held by banks and large corporationsMultinational Corporation (MNC)A multinational corporation is a company that operates in its home country, as well as in other countries around the world. It maintains a that are involved in international trade. By holding funds in another bank in a foreign currency, the bank can conduct international trade transactions and foreign exchange without having to convert its local currency into foreign currency.

A bank may have a Nostro account in any country that has a convertible currency, such as the euro, British pound, and the US dollar. If a currency is not convertible, a bank may work with a third party in the foreign country to carry out the transaction on its behalf. Both institutions on each side of the transaction are required to maintain a record of all funds held on behalf of other banks.

How a Nostro Account Works

A Nostro account is a mechanism that banks use to keep track of all funds being held in other banks in the currency of the country where the funds are held. The Nostro account is maintained in a foreign currency that can be converted for use in foreign exchange and foreign trades.

For example, assume that Bank X maintains an account in Bank Y’s home currency. To Bank X, the account will be treated as a Nostro account, while Bank Y will treat the account as a Vostro account.

When opening a Nostro account, the client bank elects to open an account with another bank that it has a banking relationship with in a foreign country. The foreign bank, in this case, is referred to as the facilitator bank. Once the bank has secured an account with the facilitator bank, the latter will assist the former in making payments for transactions using its home currency.

The facilitator bank uses its clearing network with the central bank to carry out the transaction. If the facilitator bank does not have access to the primary clearing arrangements with the central bank, it can facilitate the payments for the transaction through another bank in the same country that is a primary clearing member of the central bank.

Usually, banks use Nostro accounts when buying or selling in another country where it does not have a physical presence, and instead uses an established bank in the foreign country to carry out the transaction on its behalf.

Practical Example

If a United States resident wants to open a euro account, they do not necessarily have to travel to Europe to open the account. Instead, they can approach a local US bank to set up the euro account on their behalf. The local US bank will then open a Nostro account with a facilitator bank with a physical presence in the eurozone that they have a banking relationship with.

The facilitator bank will open a euro account, but the account will be different from the typical checking account for residents of the eurozoneEurozoneAll European Union countries that adopted the euro as their national currency form a geographical and economic region known as the Eurozone. The Eurozone forms one of the largest economic regions in the world. Nineteen of the 28 countries in Europe use the euro. The account holder will have the ability to buy or sell in the eurozone using the euro currency.

Before the adoption of the euro as the primary currency of the European Union, banks needed to hold Nostro accounts in all countries in the eurozone. However, with the adoption of the euro, a single Nostro account in the entire region is sufficient.

Nostro Account vs. Vostro Account

A Nostro account is a reference that Bank A uses to refer to its account that is on deposit in Bank B, in the local currency of the country where Bank B is located. It is simply a record that Bank A’s money is held in Bank B to facilitate foreign exchange transactions and settlement of international trade.

On the other hand, a Vostro account is a reference used by Bank B, which holds Bank A’s funds. From Bank A’s perspective, a Nostro account is denominated in foreign currencies, whereas a Vostro account is denominated in the home currency.

Banks in the United States and the eurozone often hold Vostro accounts on behalf of other foreign banks, and the funds are held in the currency of the home currency of the country where they are on deposit.

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