A nostro account is a bank account held by a financial institution in another country. The account is used to store foreign currency deposits and to conduct transactions in that currency.
The term “nostro” comes from the Italian word for “ours”, and is also used in other languages, such as Spanish (nuestro) and French (notre). Nostro accounts are typically used by banks that conduct a lot of international business or that have branches in multiple countries.
Importance of Nostro Accounts
Nostro accounts are important for two main reasons.
First, they allow banks to transact in foreign currencies without having to first convert their own currency into the foreign currency. This is important because it can save the bank time and money.
Second, nostro accounts can help banks manage their risk. By holding foreign currency deposits in a nostro account, a bank can avoid having to convert its own currency into the foreign currency, which can be subject to fluctuations in the exchange rate.
In addition, nostro accounts can be used by businesses that need to transact in foreign currencies. For example, a business that sells products to customers in other countries may use a nostro account to hold the foreign currency revenue from those sales.
Nostro accounts are typically denominated in major world currencies, such as the US Dollar, Euro, or Japanese Yen, but in reality they may also be denominated in any currency that you may need to operate that is not your own home currency. The choice of currency therefore depends on the countries where the financial institution does business and the currencies it needs to hold to meet its’ obligations.
Business Nostro Account Example – a company based in the USA, hypothetically called Company USD, does a lot of business in South Africa, and as such has a lot of contractors and suppliers who prefer to be paid in ZAR. Company USD would engage with its bank in order to request a ZAR account, which Bank USD would facilitate most likely by contacting bank ZAR, who would open an account for this purpose. To bank USD and company USD, this account would be a nostro account, or ”ours”. The exact same account to bank ZAR, would be a vostro account, or “yours”.
Nostro Account Types
There are two main types of nostro accounts; correspondent banking relationships, and nostro deposits.
- Correspondent banking relationships are established between two banks in order to facilitate the exchange of foreign currency.
- Nostro deposits are deposits made by a bank into a nostro account at another bank.
All said, nostro accounts are an important part of the international banking system and can be used by banks and businesses to save time and money, and to manage risk. This also ties in with your potential interest in forex trading as a retail user, and how your potential desire to operate an account in multiple base currencies could have ramifications for the broker you use.
Forex Trading Example – if you are a resident of the UK with a GBP denominated bank account, but wanted to have a secondary USD account that is operated via the same bank; there is a high likelihood that your bank would facilitate this by operating a nostro account with a third party bank. In the world of forex, nostro accounts are likely to be used regularly, particularly when different types of forex brokers allow you to operate your trading account in multiple base currencies.
Vostro Accounts
The word “vostro” is derived from the Latin for “yours”. Vostro accounts are used by foreign banks to settle transactions in the home currency of the domestic bank.
Nostro accounts are sometimes confused with vostro accounts as they are in effect one, and the same, account but from a different perspective. Vostro accounts are similar to nostro accounts, but they are held by financial institutions on behalf of their customers, whereas nostro accounts are the same account, but from the perspective of the customer, or an account held by a third party.
Both nostro and vostro accounts help to minimize risk and maximize efficiency in international banking transactions.