Vostro Account: Definition, Purpose, Services, and Example

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.

Understanding Vostro Accounts

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. These services include executing wire transfers, withdrawals, and deposits for customers in countries where the domestic bank does not have a physical presence.

The foreign correspondent bank might also perform treasury services, execute foreign exchange transactions, and expedite international trade on behalf of the domestic bank. The correspondent bank charges the domestic bank for the services associated with the vostro account.

Vostro Account vs. Nostro Account

The term vostro, translated from Latin, means "your," as in your account. From the foreign 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 to as nostro accounts. Nostro, translated from Latin, means "our," as in our accounts. Nostro accounts are denominated in the foreign currency of the correspondent bank.

In the context of banking and finance, a Vostro account is the account held by the respondent bank on behalf of the correspondent bank. Meanwhile, a Nostro account is the account held by the correspondent bank at the respondent bank. These two terms reflect the perspective of each bank in the correspondent banking relationship.

Uses of Vostro Accounts

There are several situations where vostro accounts are typically used. The most common situations include but are not limited to:

• International Trade. Vostro accounts make transactions in international trade possible. Vostro accounts can be used by importers and exporters to settle payments, manage currency conversions, and guarantee effective trade finance operations.
• Payment Remittance. Vostro accounts can be used for sending money to other people. Respondent banks may maintain Vostro accounts with correspondent banks in nations where their clients often remit or receive funds, facilitating quicker and easier cross-border remittance transactions.
• Foreign Currency Transactions. Vostro accounts allow responding banks to hold money in foreign currencies for foreign currency transactions. This is especially advantageous for banks that frequently carry out foreign currency transactions, including currency hedging or foreign exchange trading.
• Cost Mitigation. Vostro accounts can assist in lowering transaction costs related to international transfers and currency conversions. Respondent banks can streamline their operations and potentially reduce foreign exchange fees by storing funds in the correspondent bank's native currency.
• Regulatory Compliance: Vostro accounts make it possible for responding banks to abide by regional laws in international marketplaces. The respondent bank can guarantee compliance with regulatory requirements such as know-your-customer duties by using a correspondent bank's services through a Vostro account.
  

Vostro Accounts in an Agency Relationship

For most banks, the cost of building physical branches 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, living abroad, or who own companies that do business abroad. As an agent of the domestic bank, the correspondent bank is authorized to perform certain agreed-upon financial transactions, acting as a fiduciary in the relationship.

In this relationship, both banks perform due diligence on each other to assess their credibility, financial stability, compliance with regulations, and suitability for the intended agency relationship. The banks also negotiate terms of the agency relationship agreement, document it in a formal agreement, ensure compliance with relevant regulatory requirements, and implement the necessary operational and technical processes to facilitate transactions and reporting related to the vostro account.

Vostro Accounts in an Intermediary 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 financial 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.

In this type of relationship, the correspondent bank provides regular reports to the respondent bank. This includes detailing the transactions, balances, and other relevant information related to the vostro account. This helps the respondent bank monitor its financial activities in the foreign market and maintain oversight of its funds.

Additionally, this vostro account arrangement helps mitigate risks associated with cross-border transactions. Both banks must adhere to regulatory requirements, such as anti-money laundering and consumer regulations, ensuring compliance and enhancing the integrity of the financial system.

Example of a Vostro Account

With a vostro account relationship 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, minus the applicable fees.

The Bottom Line

A Vostro account is a bank account held by one bank on behalf of another bank, typically in a foreign currency. It allows respondent banks to provide services to their customers in foreign markets, leveraging the local banking infrastructure of the respondent bank. Vostro accounts facilitate international trade, correspondent banking relationships, foreign currency transactions, and access to local banking services.