A nostro account refers to an account that a bank holds in a foreign currency at another bank. Derived from the Latin word for “ours,” nostro accounts facilitate foreign exchange and trade transactions. Conversely, a “vostro account”—stemming from the Latin word for “yours”—is how a bank refers to the accounts that other banks have on their books, denominated in the holding bank’s home currency.
Key Highlights
- Nostro accounts simplify exchanging and trading in foreign currencies.
- Major convertible currencies include the U.S. dollar, Canadian dollar, British pound, euro, and Japanese yen.
- The bank holding a nostro or vostro account often serves as the “facilitator” bank.
- Nostro accounts differ from standard demand deposit accounts as they are denominated in foreign currencies.
How Nostro Accounts Operate
A nostro account and a vostro account actually refer to the same entity but from different perspectives. For example, Bank X could have an account with Bank Y in Bank Y’s home currency. To Bank X, this account is a nostro, meaning “our account on your books,” while to Bank Y, it is a vostro, meaning “your account on our books.” These accounts facilitate international transactions, hedge exchange-rate risk, and enable financial settlements.
Prior to the euro’s inception on January 1, 1999, banks needed to hold nostro accounts in all the respective countries that now use the euro. Since then, just one nostro account is sufficient for the entire eurozone. If a country exits the eurozone, banks must re-establish nostros in that country’s new currency to continue making payments. Large commercial banks worldwide generally hold nostro accounts in every country with a convertible currency.
Real-World Example: Payment Using a Nostro Account
Consider a scenario where Bank A in the U.S. enters a spot foreign-exchange contract to buy British pounds from Bank B in Sweden.
On the settlement date, Bank B must deliver pounds from its nostro account in the U.K. to the nostro account of Bank A, also in the U.K. Simultaneously, Bank A needs to pay dollars in the U.S. to the nostro account of Bank B.
Nostro Accounts: Limitations and Constraints
Central banks in many developing countries restrict trading in their currencies to control imports, exports, and exchange rates. Consequently, banks often don’t hold nostro accounts in these countries due to limited foreign exchange business. In such situations, banks employ correspondent banks to make payments on their behalf.
Distinction from Traditional Demand Deposit Accounts
Nostro accounts differ from demand deposit accounts, which are in the currency of the bank holding the account. Nostro accounts hold balances in the foreign currency of the other country where the nosso account is based.
Meaning Behind ‘Nostro’
Nostro originates from the Latin term for “ours.” They streamline foreign exchange and trade transactions efficiently.
Are There Fees for Nostro Accounts?
Nostro accounts usually incur maintenance fees since they are an additional feature. While individuals don’t have nostro accounts, these accounts are exclusive to businesses or governments.
Conclusion
Nostro accounts ease the process of exchanging and trading in foreign currencies, particularly helping to hedge exchange-rate risk. These accounts primarily exist in major convertible currencies such as U.S. dollars, Canadian dollars, British pounds, euros, or Japanese yen. Banks holding nostro accounts often serve as facilitators, enabling efficient global financial transactions. Nostro accounts are unique to businesses and governments and differ from standard demand deposit accounts primarily because they are denominated in foreign currencies.
Related Terms: Vostro Account, Convertible Currency, Demand Deposit Account.
References
- European Union. “History and Purpose”.
- SoFi Learn. “All You Need to Know about Nostro Accounts”.
