Vostro Account
A vostro account is an account in which a correspondent bank holds in the domestic currency for foreign banks. This can be used by domestic banks to provide international banking services to their clients who have global banking needs.
Updated: November 10, 2024
A vostro account is an account in which a correspondent bank holds in the domestic currency for foreign banks. This can be used by domestic banks to provide international banking services to their clients who have global banking needs. These accounts are an essential aspect of correspondent banking in which the bank holding the funds manages the account of a foreign counterpart or acts as custodian for them. A foreign bank also acts as an agent providing financial services on behalf of a domestic bank.
Performing foreign exchange transactions, enabling deposits and withdrawals, executing wire transfers and expediting international trade are included in Vostro account services.
What is a Vostro Accounts?
A foreign correspondent bank can act as an agent or intermediary for a domestic bank that holds a vostro account. This allows the correspondent bank to facilitate wire transfers, withdrawals, and deposits for customers in regions where the domestic bank has no physical presence.
Additionally, treasury services may be provided, foreign exchange transactions can be executed, and international trade can be expedited by the foreign correspondent bank on behalf of the domestic bank. The correspondent bank will charge the domestic bank for the services provided through the vostro account.
Smaller domestic banks, lacking the financial resources or presence in foreign countries, often rely on the services of larger correspondent banks as a cost-effective solution to meet the global banking needs of their clients.
Vostro Account vs. Nostro Account:
The term "vostro" comes from Latin, meaning "your," referring to "your account." Funds held on behalf of other banks by a foreign correspondent bank are called vostro accounts, and they are denominated in the local currency of the correspondent bank.
The term "nostro," also from Latin, means "our," as in "our account." Funds deposited at correspondent banks from the perspective of domestic banks are called nostro accounts and are denominated in the foreign currency of the correspondent bank.
Banks primarily use the terms "nostro" and "vostro" when one bank holds money at another in a correspondent account, known as a nostro or vostro account. Both banks maintain records to track the amount of money held on behalf of each other, with the terms distinguishing between the two sets of records.
A vostro account refers to the money of a foreign bank held by the domestic bank in the local currency, while a nostro account refers to the domestic bank’s money held by a foreign bank in the foreign currency. A nostro account tracks how much of the bank’s funds are held by the foreign bank, whereas a vostro account records the money held by or owed to the bank by a third party, such as an individual, company, or another bank.
Nostro accounts are in foreign currency, while vostro accounts are in the local currency of the bank where the funds are held. Nostro accounts are commonly used for currency settlement when a bank needs to hold balances in a foreign currency.
Vostro Accounts in an Agency Relationship:
The cost of building physical branches for their customers who might need banking services in every country is not possible for most banks. Therefore, domestic banks can have agency relationship agreements with correspondent banks to provide facilities for customers who are living abroad, traveling or who own companies that do business abroad. The correspondent bank is authorized to perform certain agreed-upon financial transactions as an agent of the domestic bank. The bank can act as a depositary in the relationship.
Vostro Accounts in an Intermediary Relationship:
A correspondent bank acts as the financial intermediary in the transaction when funds are wired between a domestic and a foreign bank which do not have a direct relationship. The originator of the transfer need to send the amount of the wire with applicable fees to the vostro account held on its behalf by the correspondent bank to facilitate the wire. The fees and the amount of the wire will be deducted by the correspondent bank from the vostro account and a domestic wire will be executed to the receiving bank.
Example of a Vostro Account:
The customer of a domestic bank with a vostro account relationship in place can walk into the office of a correspondent bank to withdraw or deposit funds. The withdrawal amount with any fees from the customer's account will be deducted and a transfer will be executed to the vostro account held by the correspondent bank to process a customer's withdrawal of funds at a correspondent bank. The funds deducted from the vostro account will be converted to the local currency, and will be paid to the domestic bank's customer, without the applicable fees.