Loading the player...

What is a 'Nostro Account'

Nostro account refers to an account that a bank holds in a foreign currency in another bank. Nostros, a term derived from the Latin word for "ours," are frequently used to facilitate foreign exchange and trade transactions. The opposite term vostro accounts, derived from the Latin word for "yours," is how a bank refers to the accounts that other banks have on its books in its home currency.

BREAKING DOWN 'Nostro Account'

Nostro account and vostro account refer to the same thing from a different perspective. For example, Bank X has an account with Bank Y in Bank Y's home currency. To Bank X, that 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 are used to facilitate international transactions and to settle transactions that hedge exchange rate risk.

Locations of Nostro Accounts

Most large commercial banks worldwide hold nostro accounts in every country with a convertible currency. Major examples of convertible currencies are the U.S. dollar, Canadian dollar, British pound, the European euro and the Japanese yen. Prior to the advent of the euro as a currency for financial settlements on January 1, 1999, banks needed to hold nostro accounts in all of the countries that now use the euro. Since that date, one nostro for the entire euro zone has been sufficient. If a country were to leave the euro zone, either voluntarily or involuntarily, banks would need to re-establish nostros in that country in its new currency in order to continue making payments. The most commonly discussed potential exit from the euro zone has been Greece, which received multiple bailout packages since the beginning of the 2008 financial market crisis.

Non-Convertible Currencies

The central banks of many developing countries limit the buying and selling of their currencies, which is usually to control imports and exports and to control the exchange rate. Banks generally do not hold nostro accounts in those countries, as there is little or no foreign exchange business.

When a bank needs to make a payment in a country where it does not hold a nostro account, it can use a bank with which it has a correspondent relationship to make the payment on its behalf.

Example of a Payment Using a Nostro

The following example illustrates the process of making a payment using a nostro. Bank A in the United States enters into a spot foreign exchange contract to buy British pounds from Bank B, which is in Sweden. On the settlement date, Bank B must deliver pounds from its nostro account in the United Kingdom to the nostro account of Bank A, also in the United Kingdom. On the same day, Bank A must pay dollars in the United States to the nostro account of Bank B.

RELATED TERMS
  1. Vostro Account

    The account that a correspondent bank, usually located in the ...
  2. Due From Account

    An asset account in the general ledger that indicates the amount ...
  3. Official Settlement Account

    A type of account used in balance of payments accounting to keep ...
  4. Chart Of Accounts

    A listing of each account a company owns, along with the account ...
  5. Super NOW Account

    An account created in 1982 that offers a higher interest rate ...
  6. Account Activity

    A banking term that refers to any activity that creates a debit ...
Related Articles
  1. Investing

    What is a Nostro Account?

    A nostro account is a bank account held in a foreign country by a domestic bank, denominated in the currency of that country.
  2. Investing

    Should You Open A Foreign Savings Account?

    Would opening a savings account in a foreign bank make sense for you? The pros and cons, how to establish one – and alternatives to consider.
  3. Investing

    What is a Capital Account?

    Capital account is an economic term that refers to the net change in investment and asset ownership for a nation.
  4. Investing

    What's a Correspondent Bank?

    A correspondent bank is a bank that acts on behalf of another bank, usually a foreign bank.
  5. Managing Wealth

    2015's Top Checking Account Promotions

    Open a checking account in 2015 and the bank could give you a cash bonus. Check out these top offers.
  6. Personal Finance

    Bag The Best Bank Account

    Take advantage of the deals banks offer, and find the right account for your financial situation.
  7. Personal Finance

    How Americans Can Open a Bank Account In Thailand

    Have your paperwork in order and be sure to shop around.
  8. Insights

    Current Account Deficit

    A current account deficit occurs when a country spends more money on the goods and services it imports than it receives for the goods and services it exports.
  9. Insights

    The World's Top 10 Banks

    Learn more about the world's largest banks and how more financial power shifts eastward as China is home to four of the world's largest banks.
  10. Personal Finance

    Handling High-Yield Savings Accounts

    Is this the savings route for you? Read on to find out what these accounts have to offer.
RELATED FAQS
  1. What is the difference between a Nostro and a Vostro account?

    Understand the terms nostro account and vostro account, and learn how they are used for accounting purposes in international ... Read Answer >>
  2. What role does a correspondent bank play in an international transaction?

    Understand what a correspondent bank is and how it operates to facilitate currency exchange and financial transactions between ... Read Answer >>
  3. What does it mean when a country has little activity in its capital account?

    Know what a country's capital account represents and understand what the implications are if a country has little activity ... Read Answer >>
  4. What does a negative balance in the capital account mean?

    Understand what a country's capital account represents and the significance of a negative, or deficit, balance in the capital ... Read Answer >>
  5. What does a positive capital account balance mean?

    Learn about a capital account, the four categories of transactions that comprise it and the meaning of a positive capital ... Read Answer >>
  6. What is the difference between the current account and the capital account?

    Learn how to differentiate between the capital account and the current account, the two components of the balance of payments ... Read Answer >>
Trading Center