Nostro Account
What Is a Nostro Account?
A nostro account alludes 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 habitually used to work with foreign exchange and trade transactions. The contrary term "vostro accounts," derived from the Latin word for "yours," is the way a bank alludes to the accounts that different banks have on its books in its home currency.
How a Nostro Account Works
A nostro account and a vostro account really allude to a similar entity however according to an alternate point of view. For instance, Bank X has an account with Bank Y in Bank Y's home currency. To Bank X, that is a nostro, signifying "our account on your books," while to Bank Y, it is a vostro, signifying "your account on our books." These accounts are utilized to work with international transactions and to settle transactions that hedge exchange rate risk.
Prior to the coming of the euro as a currency for financial settlements on Jan. 1, 1999, banks expected to hold nostro accounts in every one of the countries that currently utilize the euro. Since that date, one nostro for the whole eurozone has been adequate. Assuming a country were to leave the eurozone, either willfully or automatically, banks would have to restore nostros in that country in its new currency to keep making payments.
Most large commercial banks worldwide hold nostro accounts in each country with a convertible currency.
Illustration of a Payment Using a Nostro Account
The accompanying model illustrates the most common way of making a payment utilizing a nostro account. Bank An in the United States goes 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, likewise in the United Kingdom. Around the same time, Bank A must pay dollars in the United States to the nostro account of Bank B.
Special Considerations
The central banks of many emerging nations limit the buying and selling of their currencies, which is ordinarily to control imports and exports and to control the exchange rate. Banks generally don't hold nostro accounts in that frame of mind, as there is next to zero foreign exchange business. At the point when a bank needs to make a payment in a country where it doesn't hold a nostro account, it can utilize a bank with which it has a correspondent relationship to make the payment for its benefit.
Features
- The bank that is holding a nostro or vostro account might be called the "facilitator" bank.
- Nostro accounts work on the most common way of trading and trading in foreign currencies.
- Major instances of convertible currencies are the U.S. dollar, Canadian dollar, British pound, the euro, and the Japanese yen.
- Nostro accounts are not equivalent to standard demand deposit accounts on the grounds that these types of accounts are designated in foreign currencies.
