Over 1.8 million professionals use CFI to learn accounting, financial analysis, modeling and more. Start with a free account to explore 20+ always-free courses and hundreds of finance templates and cheat sheets. The central bank’s move has come in the wake of increasing pressure on the Indian currency in the wake of Russia’s invasion of Ukraine and sanctions by the US and the EU. Therefore, the accounts opened by IndusInd and UCO are Vostro, and the ones opened by Russia’s Sberbank and VTB Bank are Nostro accounts. Two kinds of accounts, Vostro and Nostro, are often mentioned together. Both Vostro and Nostro are technically the same type of account, with the difference being who opens the account and where.
It is a foreign currency account opened through your local bank at a bank in the country where the currency is desired. This account is our account in another country, and a Vostro account is the account of a foreigner in our country. This article is part of our series on banking basics, ranging from opening different types of bank accounts around the world to understanding how various aspects of the banking system operate.
From GTBank’s perspective, its U.S. dollar account with Citibank is a nostro account. From Citibank’s perspective, it is holding a vostro account for GTBank in U.S. dollars. Nostros, a term derived from the Latin word for “ours,” are frequently used to facilitate foreign exchange and trade transactions. To understand different foreign exchange transaction terms, we must first understand what the terms of home currency and foreign currency are. Foreign currency can be explained like any other currency other than home currency. A record of Bank A’s cash is held in Bank B to work with foreign trade exchanges and repayment of global business.
What is a Vostro Account?
Unlike a correspondent bank account, which facilitates transactions on behalf of the account holder’s customers, these accounts are used to facilitate the account holder’s own transactions. This money deposited will then be transferred by Citibank via SWIFT to GTBank’s U.S. dollar account in Nigeria. SWIFT refers to the Society for Worldwide Interbank Financial Telecommunications, a member-owned cooperative that offers safe and secure financial transactions for its members. With the transfer complete, GTBank receives the dollar-denominated funds, converts it into the local currency, i.e., the naira, and deposits it to the local accounts of the recipients. The bank that’s holding the money on your behalf describes it as a vostro account.
For both nostro and vostro accounts, the domestic bank (i.e., the bank that is holding the account) acts as the caretaker for the account and is sometimes referred to as the „facilitator” bank. Banks in the United Kingdom or the United States often hold a vostro account on behalf of a foreign bank. The vostro account is held in the currency of the country where the money is on deposit.
The intermediary bank then helps to facilitate the movement of that money to your home bank, where it can be converted into the local currency. The accounts benefit clients with global banking needs and allow them, through their own bank, to open accounts in other countries as they need. Most Vostro accounts will have the same preferred services as a regular bank account, including foreign exchange transactions, deposits and withdrawals, and money or wire transfers.
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- “Nostro” is Latin and translates to “ours” and is used to facilitate international trade transactions involving different currencies and foreign exchange.
- 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.
- The Nostro account is maintained in a foreign currency that can be converted for use in foreign exchange and foreign trades.
But instead of holding those funds in pounds sterling, the money is held in the local currency, i.e., Japanese yen, instead. A nostro account is an account a bank holds in a foreign bank, which is denominated in the local currency of the foreign bank. Nostro’s latin meaning is ours – so from the perspective of the domestic bank, the nostro account is our account, held by an international bank, in the currency of that country. An example of a nostro account https://1investing.in/ would be a bank account that is opened in India by a US bank in order to facilitate foreign exchange and international trade transactions. On the other hand, an Indian bank can also have one of these accounts held with a bank in the United States. Nostro accounts might be less familiar to you than other types of bank accounts but it’s possible that you may need to use one to complete transactions in foreign currencies as a business owner or investor.
A Nostro account is a bank account that holds funds in the foreign country’s currency of which that correspondent firm presides. “Nostro” is Latin and translates to “ours” and is used to facilitate international trade transactions involving different currencies and foreign exchange. A Nostro account is used for the customer to keep track of their funds held internationally in the country’s respective currency. International banking transactions don’t always work exactly the same as domestic banking. For example, banks can use nostro accounts to hold funds in foreign currencies.
In short, nostro and vostro are accounting distinctions that represent the same account held by a financial institution at another financial institution. Say that a U.S.-based company is interested in doing business in France. Their current bank doesn’t offer banking services in Europe, but they’re able to find a facilitator bank that offers nostro accounts. Banks have nostro accounts to let them process transactions in foreign currencies without having a physical presence in that country. 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.
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These accounts are often set up to make it easier for businesses to complete foreign trade transactions. International students who want to study in another country can open a Nostro account with a bank in their country, which will then set up their performance in a foreign bank. Nostro and Vostro are variations on the Latin words that mean „ours” and „yours,” respectively. The ledger kept by the depositing customer called it a Nostro ledger; the bank kept the corresponding Vostro ledger.
How Nostro Accounts Work
Also, keep in mind that nostro accounts play an important part in keeping international trade moving behind the scenes. A Vostro account is part of correspondent banking where a foreign bank holds the funds and acts as an intermediary to those funds. The account is held on behalf of a domestic bank that manages and supervises the funds. The domestic bank will approach the international correspondent bank to open an account on behalf of their client.
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Because as a person is working with financial institutions outside of the United States, one must follow specific rules and regulations. Suppose the facilitator bank doesn’t approach the necessary clearing arrangements with the national bank. In that case, it can work with the installments for the exchange through one more bank in the country, which is a primary clearing member of the national bank.
Are Nostro Accounts Similar to Traditional Demand Deposit Accounts?
Both banks in the foray must keep track of the amount of money held by one bank on behalf of the other. The terms Nostro and Vostro are used to distinguish between each bank’s two sets of accounting records. While opening a Nostro account, the client bank chooses to open an account with one more bank with a financial relationship within a far-off country. The foreign bank, for this situation, is alluded to as the facilitator bank. It is an instrument that banks use to monitor all assets being held in different banks in the currency of the nation where the assets are held. It is kept within a foreign currency that can be changed for use in foreign trade and exchanges.
This bank account is different from most demand deposit accounts in banks because they are typically in the currency of the country where the deposit is being held. A Nostro account is a bank account owned by a bank in one country and held by another bank in a foreign country in the foreign country’s currency. If a domestic bank, Bank A, opens an account in a foreign bank, Bank B, in the foreign currency, then Bank A they have maintained a Nostro account with Bank B, while Bank B maintains a Vostro account with Bank A. The former account is maintained by a homegrown bank with the foreign bank in the foreign currency, whereas the latter is the account held by the foreign bank in the domestic currency of that bank.
What is a Nostro Account?
„Nostro” and „vostro” are two different terms used to describe the same bank account. The terms are used when one bank has another bank’s money on deposit, typically in relation to international trading or other financial transactions. Banks typically collaborate with third parties to facilitate transactions like these. These banks are nothing like deposit accounts, and they require that deposit accounts be kept in the same currency as a bank.