What is a 'Vostro Account'

A vostro account is an account a correspondent bank holds on behalf of another bank. These accounts are an essential aspect of correspondent banking in which the bank holding the funds acts as custodian for or manages the account of a foreign counterpart. For example, if a Spanish life insurance company approaches a U.S. bank to manage funds on the Spanish life insurer's behalf, the account is deemed by the holding bank as a vostro account of the insurance company.

BREAKING DOWN 'Vostro Account'

A vostro account is established to enable a foreign correspondent bank to act as an agent or provide services as an intermediary for a domestic bank to execute wire transfers, withdrawals and deposits for customers in countries where the domestic bank does not have a physical presence. The term vostro translated from Latin means "yours," as in your account. From the correspondent bank’s point of view, the funds held on behalf of other banks are referred to as vostro accounts and are denominated in the local currency.

From the perspective of domestic banks, the funds deposited at correspondent banks are referred as nostro accounts. Nostro translated from Latin means "ours," as in our accounts. Nostro accounts are denominated in the foreign currency of the correspondent bank.

Vostro Accounts in an Agency Relationship

For most banks, the cost of establishing a physical presence in every country their customers might need banking services is prohibitive. As a solution, domestic banks can initiate agency relationship agreements with correspondent banks to transact business for customers who are traveling or living abroad.

With these relationships in place, the customer of a domestic bank can walk into the office of a correspondent bank to withdraw or deposit funds. For example, to process a customer’s withdrawal of funds at a correspondent bank, the domestic bank deducts the withdrawal amount plus any fees from the customer’s account and executes a transfer to the vostro account held by the correspondent bank. The funds are converted to the local currency, deducted from the vostro account and paid to the domestic bank’s customer, less the applicable fees.

Vostro Accounts in an Intermediate Relationship

When funds are wired between a domestic and a foreign bank that do not have a direct relationship, a correspondent bank acts as the intermediary in the transaction. To facilitate the wire, the originator of the transfer sends the amount of the wire plus applicable fees to the vostro account held on its behalf by the correspondent bank. The correspondent bank deducts the fees and the amount of the wire from the vostro account and executes a domestic wire to the receiving bank.

RELATED TERMS
  1. Nostro Account

    A nostro account is a bank account held in a foreign country ...
  2. Book Transfer

    A book transfer is the transfer of funds from one deposit account ...
  3. Bank Wire

    An electronic message system allowing major banks to communicate ...
  4. Wire Transfer

    A wire transfer is an electronic transfer of funds across a network ...
  5. Bank Run

    A bank run occurs when a large number of customers withdraw their ...
  6. Open Banking

    Open Banking is a system that provides a user with a network ...
Related Articles
  1. Tech

    The Pros And Cons Of Internet Banks

    Learn how internet banking services stack up against their brick-and-mortar peers. Find out what internet banks have to offer and where they fall short.
  2. Small Business

    Best Checking Accounts For Small Businesses

    What you need to know to choose the best checking account for your small business – and where to look.
  3. Personal Finance

    10 Bank Promotions That Pay You To Open An Account

    Find out which banks are running cash promotions this summer.
  4. Personal Finance

    Choose To Beat The Bank

    From internet banking to credit unions, it's in your power to cut fees and maximize service.
  5. Personal Finance

    What is Fractional Reserve Banking?

    Fractional reserve banking is the banking system most countries use today.
  6. Personal Finance

    5 Bank Fees You May Not Know About

    Banking regulations have recently changed and fees are following suit.
  7. Insights

    How Online Banking Is Overtaking Traditional Banking

    Is traditional banking doomed to be surpassed by online banking?
RELATED FAQS
  1. 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 >>
  2. What is the difference between a 'nostro' and a 'vostro' account?

    Nostro and vostro are terms used, typically in relation to international trading, when one bank has another bank's money ... Read Answer >>
  3. What is the difference between a Nostro account and a regular bank account?

    Read about the differences between a nostro bank account, vostro bank account and the standard commonly used demand deposit ... Read Answer >>
  4. Where did the term 'Nostro' account come from?

    Discover where the term "nostro account" came from and how, since its Renaissance foundation, its meaning has evolved to ... Read Answer >>
  5. Correspondent banks versus intermediary banks

    Learn about the differences between intermediary banks and correspondent banks — and when these terms can be interchangeable. Read Answer >>
Trading Center