Nostro and vostro accounts

Nostro and vostro accounts are fundamental to how banks facilitate international transactions. To understand them, it's crucial to remember that they're two sides of the same coin, viewed from different banks' perspectives. Here's a clear explanation:

Core Concepts:

• Correspondent Banking:
  • International transactions often require banks in different countries to work together. This is done through "correspondent banking" relationships.
  • To facilitate these transactions, banks hold accounts with each other.
• Nostro vs. Vostro:
  • These terms are used to describe those accounts, depending on which bank is doing the accounting.
  • They originate from Italian: "nostro" means "ours," and "vostro" means "yours."

Here's a breakdown:

• Nostro Account:
  • This is "our account" held by another bank.
  • It's an account a bank holds in a foreign currency at a bank in that foreign country.
  • For example: A bank in India holding a U.S. dollar account at a bank in the United States. From the Indian banks perspective, that is a Nostro account.
• Vostro Account:
  • This is "your account" held by us.
  • It's an account a foreign bank holds in our currency at our bank.
  • For example: From the United states banks perspective, the indian banks U.S. dollar account, that is held at the U.S. bank, is a Vostro account.

Key Points:

• Currency:
  • Nostro accounts are typically held in a foreign currency.
  • Vostro accounts are typically held in the local currency of the bank holding the account.
• Purpose:
  • These accounts are essential for facilitating international trade, foreign exchange transactions, and cross-border payments.
• Perspective:
  • The key to understanding them is to remember that it's all about the perspective of the bank doing the accounting.

In simpler terms:

• Imagine two banks, one in the U.S. and one in Japan.
• If the Japanese bank holds a U.S. dollar account at the U.S. bank, the Japanese bank calls it a "nostro" account.
• The U.S. bank calls that same account a "vostro" account.

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By Jerry Ramonyai