What Is a Nostro Account?

A nostro account refers to an account that a bank holds in a foreign currency at another bank. Nostros, a term derived from the Latin word for "ours," are frequently used to facilitate foreign exchange and trade transactions. The opposite term "vostro accounts"—derived from the Latin word for "yours"—is how a bank refers to the accounts that other banks have on their books denominated in the holding bank's home currency.

How a Nostro Account Works

A nostro account and a vostro account actually refer to the same entity but from a different perspective. For example, Bank X has an account with Bank Y in Bank Y's home currency. To Bank X, that is a nostro, meaning "our account on your books," while to Bank Y, it is a vostro, meaning "your account on our books."

These accounts are used to facilitate international transactions and to settle transactions that hedge exchange-rate risk.

Prior to the advent of the euro as a currency for financial settlements on Jan. 1, 1999, banks needed to hold nostro accounts in all the countries that now use the euro.

Since that date, one nostro account for the entire eurozone has been sufficient. If a country were to leave the eurozone, either voluntarily or involuntarily, banks would need to re-establish nostros in that country in its new currency in order to continue making payments.

Example of a Payment Using a Nostro Account

The following example illustrates the process of making a payment using a nostro account. Bank A in the U.S. enters 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 U.K. to the nostro account of Bank A, also in the U.K. On the same day, Bank A must pay dollars in the U.S. to the nostro account of Bank B.

Limitations on Nostro Accounts

The central banks of many developing countries limit the buying and selling of their currencies, which is usually to control imports and exports and to control the exchange rate. Banks generally don't hold nostro accounts in those countries, as there is little or no foreign exchange business.

When a bank needs to make a payment in a country where it doesn't hold a nostro account, it can use a bank with which it has a correspondent relationship to make the payment on its behalf.

The Bottom Line

Nostro accounts simplify the process of exchanging and trading in foreign currencies because they ease transactions conducted in another currency while helping hedge exchange-rate risk. These accounts are most often held in the major convertible currencies: U.S. or Canadian dollars, the British pound, the euro, or the Japanese yen.

The opposite term, vostro account, is the way in which a bank refers to the accounts that foreign banks have on their books that are denominated in the holding bank's home currency. The bank holding a nostro or vostro account may be called the "facilitator" bank. Nostro accounts differ from standard demand deposit accounts because they are denominated in foreign currencies. Also, only businesses or governments have nostro or vostro accounts, they aren't offered in the same way to individual account holders.