Nostro Account vs. Vostro Account: What's the Difference?

Source:-Investopedia:By J.B. MAVERICK Updated May 03, 2022 Reviewed by KHADIJA KHARTIT Fact checked by KIRSTEN ROHRS SCHMITT -used here for educational purposes only

Nostro Account vs. Vostro Account

"Nostro" and "vostro" are two different terms used to describe the same bank account. The terms are used when one bank has another bank's money on deposit, typically in relation to international trading or other financial transactions.

1

Both banks in the venture must record the amount of money being stored by one bank on behalf of the other bank. The terms nostro and vostro are used to differentiate between the two sets of accounting records kept by each bank.

Nostro and vostro are variations on the Latin words that mean "ours" and "yours," respectively. Modern retail banking is derived from 13th and 14th century Italy, where both depositors and retail banks maintained ledgers of their account balances. The ledger kept by the depositing customer called it a nostro ledger; the bank kept the corresponding vostro ledger.

2

KEY TAKEAWAYS

• Nostro and vostro are terms used to describe the same bank account; the terms are used when one bank has another bank's money on deposit.
• Nostro and vostro are used to differentiate between the two sets of accounting records kept by each bank.
• Nostro comes from the Latin word for "ours," as in "our money that is on deposit at your bank."
• Vostro comes from the Latin word for "yours," as in "your money that is on deposit at our bank."

Nostro Account

A Nostro account is a reference used by Bank A to refer to "our" account held by Bank B. Nostro is a shorthand way of talking about "our money that is on deposit at your bank."1

The Nostro account is the record of the bank that has money on deposit at another bank. These accounts are often used to simplify settlements of trade and foreign exchange transactions.

 Nostro accounts differ from standard demand deposit bank accounts in that they are usually held by financial institutions, and they are denominated in foreign currencies.

3

Vostro Account

Vostro is the term used by Bank B, where bank A's money is on deposit. Vostro is a reference to "yours" and refers to "your money that is on deposit at our bank." A vostro account is like any other account held by a bank. The account is a record of money owed to or maintained by a third party, typically another bank, but it can be either a company or an individual.

Banks in the United Kingdom or the United States often hold a vostro account on behalf of a foreign bank. The vostro account is held in the currency of the country where the money is on deposit.

4

Nostro vs. Vostro Example

Let's look at an example. GTBank, a Nigerian bank, gets a lot of money sent to its customers at home from the United States in the form of remittances. Since GTBank does not have a physical presence in the United States, it enters into an agreement with Citibank where the latter has an account remotely opened for GTBank in U.S. dollars. This way, money received by U.S. customers and businesses sending money to GTBank account holders in Nigeria will be deposited in the account that GTBank has with Citibank.

This money deposited will then be transferred by Citibank via SWIFT to GTBank's U.S. dollar account in Nigeria. SWIFT refers to the Society for Worldwide Interbank Financial Telecommunications, a member-owned cooperative that offers safe and secure financial transactions for its members.

 With the transfer complete, GTBank receives the dollar-denominated funds, converts them into the local currency (i.e., the naira), and deposits them to the local accounts of the recipients.

5

From GTBank's perspective, its U.S. dollar account with Citibank is a nostro account. From Citibank's perspective, it is holding a vostro account for GTBank in U.S. dollars.

 

For both nostro and vostro accounts, the domestic bank (i.e., the bank that is holding the account) acts as the caretaker for the account and is sometimes referred to as the "facilitator" bank.

Nostro accounts with debit balances are considered cash assets. Contrarily, vostro accounts with a credit balance are considered liabilities.

7

 Computerized accounting allows for easily reconciling nostro and vostro accounts just by using "+" or "-" signs in the banks' respective accounting systems.