Nostro and vostro are accounting terms used to distinguish an account held for another
entity from an account another entity holds.
The entities in question are almost always, but need not be, banks.
Origin It helps to recall that the term account refers
to a record of transactions, whether current, past or future, and whether in money, or shares,
or other countable commodities.
Originally a bank account just meant the record kept by a banker of the money they were holding
on behalf of a customer, and how that changed as the customer made deposits and withdrawals.
Some customers will keep their own records of their transactions, for instance, so they
can check for errors by the bank.
That record kept by the customer is also an account, of the money the bank is holding
for them.
When that customer is another bank, since they also keep other accounts there is a need
to clearly differentiate between these two types of accounts.
Understanding Terminology Definition
The terms nostro and vostro remove the potential ambiguity when referring to these two separate
accounts of the same balance and set of transactions.
Speaking from the bank's point-of-view: A nostro is our account of your money, held
by you A vostro is your account of our money, held
by us Note that all "bank accounts" as the term
is normally understood, including personal or corporate checking, loan, and savings accounts,
are treated as vostros by the bank.
They also regard as vostro purely internal funds such as treasury, trading and suspense
accounts; although there is no "you" in the sense of an external customer, the money is
still "held by us".
Base description Thus basically the terms can be described
as: A nostro account is one which is held within
a foreign country by a domestic bank, in the currency of the foreign country.
These accounts are utilised for facilitating the settlements of Forex and foreign trades.
A vostro account is one which is held within a domestic country by a foreign bank, in the
currency of the domestic country.
For these accounts the domestic bank is acting like a custodian or managing the accounts
of a foreign counterpart.
This is also known as a loro account.
A client bank elects to open an account - nostro with another facilitator bank, in the absence
of having access to primary clearing arrangements, for settling Treasury or Trade transactions.
The facilitator bank, may or may not directly be a participant of the primary clearing system
or even be in the country of the origin of currency.
From the facilitator bank's perspective, the client bank's account is a vostro.
Accounting Conventions
A bank counts a nostro account with a debit balance as a cash asset in its balance sheet.
Conversely, a vostro account with a credit balance is a liability, and a vostro with
a debit balance is an asset.
Thus in many banks a credit entry on an account is regarded as negative movement, and a debit
is positive - the reverse of usual commercial accounting conventions.
With the advent of computerised accounting, nostros and vostros just need to have opposite
signs within any one bank's accounting system; that is, if a nostro in credit has a positive
sign, then a vostro in credit must have a negative sign.
This allows for a reconciliation by summing all accounts to zero - the basic premise of
double-entry bookkeeping.
Typical usage Nostro accounts are mostly commonly used for
currency settlement, where a bank or other financial institution needs to hold balances
in a currency other than its home accounting unit.
For example: First National Bank of A does some transactions in USD, but banks in A will
only handle payments in AUD.
So FNB of A opens a USD account at foreign bank Credit Mutuel de B, and instructs all
counter-parties to settle transactions in USD at "account no.
123456 in name of FNBA, at CMB, X Branch".
FNBA maintains its own records of that account, for reconciliation; this is its nostro account.
CMB's record of the same account is the vostro account.
Now, FNBA sells AUD1,000,000 to C for a net consideration of USD2,000,000.
FNBA will make the following entries in its own accounting system:
Over at CMB, they record the following transaction: ????? [This is somewhat simplified; in reality
C may not have an account with FNBA's corresponding bank, and will make settlement by cheque or
some form of electronic funds transfer.
In this case CMB will make entries on several other accounts, such as a Teller's receiving
account, or a clearing account with the third bank that the cheque was written on.]
Related expressions There is also the notion of a loro account,
which is a record of an account held by a second bank on behalf of a third party; that
is, my record of their account with you.
In practice this is rarely used, the main exception being complex syndicated financing.
In the same style as above: A loro is our account of their money, held
by you See also
Correspondent account External links
Nostro Accounts in Forex Market at GetHow Vostro Accounts in Forex Market at GetHow
Nostro Accounts - Definition at Investopedia Vostro Accounts - Definition at Investopedia