nostro account
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''Nostro'' and ''vostro'' (from
Italian Italian(s) may refer to: * Anything of, from, or related to the people of Italy over the centuries ** Italians, an ethnic group or simply a citizen of the Italian Republic or Italian Kingdom ** Italian language, a Romance language *** Regional Ita ...
, ''nostro'' and ''vostro''; English, 'ours' and 'yours') are accounting terms used to distinguish an account held for another entity from an account another entity holds. The entities in question are usually
bank A bank is a financial institution that accepts Deposit account, deposits from the public and creates a demand deposit while simultaneously making loans. Lending activities can be directly performed by the bank or indirectly through capital m ...
s. The terms ''nostro'' and ''vostro'' are used, mainly by banks, when one bank keeps money at another bank (in a
correspondent account A correspondent account is an account (often called a nostro or vostro account) established by a banking institution to receive deposits from, make payments on behalf of, or handle other financial transactions for another financial institution. Co ...
often called a nostro or vostro account). Both banks need to keep records of how much money is being kept by one bank on behalf of the other. In order to distinguish between the two sets of records of the same balance and set of transactions, banks refer to the accounts as ''nostro'' and ''vostro''. Speaking from the point of view of the bank whose money is being held at another bank: * A ''nostro'' is our account of ''our'' money (in which country you are staying), held by the ''other bank'' or "Foreign Bank". * A ''vostro'' is our account of ''other bank'' ''/'' "Foreign Bank's" money, held by ''us'' (by your country's bank) A ''vostro'' account is a record of money held by a bank or owed to a bank by a third party (an individual, company or bank). The ''nostro'' account is a way of keeping track of how much of the bank’s money is being held by the other bank. This is similar to an individual keeping a detailed record of every payment in and out of his or her bank account so that she/he knows the balance at any point in time.


Understanding terminology


Base description

In normal usage: * A ''nostro'' account is in foreign currency (a record of funds held by a bank in another country in the currency of that country) i.e. a bank in country A keeping a record of money held by a bank in country B, in the currency of country B. * A ''vostro'' account is in the local currency of the bank where the money is being held i.e. it is the bank in country B's record of the money kept by the bank from country A with it. For these accounts, the domestic bank is acting like a custodian or managing the accounts of a foreign counterpart. These accounts are utilized for facilitating the settlements of forex and foreign trades. A ''client'' bank elects to open an account with another ''facilitator'' bank. The ''facilitator'' bank will assist the ''client'' bank in making payments in its country's currency, usually using its own access to primary clearing arrangements (generally with the central bank in the country where the currency is considered a local currency). In some cases, the ''facilitator'' bank may not be a primary clearing member but they will have the ability to make payments in local currency, possibly through another bank in the same country.


Loro accounts

There is also the notion of a ''loro'' account ("theirs"), which is a record of an account held by a second bank on behalf of a third party; that is, my record of ''their'' account with you. In practice this is rarely used, the main exception being complex syndicated financing. In the same style as above: * A ''loro'' is our account of ''their'' money, held by you.


Accounting


Conventions

A bank counts a ''nostro'' account with a debit balance as a cash asset in its balance sheet. Conversely, a ''vostro'' account with a credit balance (i.e. a deposit) is a liability, and a ''vostro'' with a debit balance (a loan) is an asset. Thus in many banks a credit entry on an account ("CR") is regarded as negative movement, and a debit ("DR") is positive - the reverse of usual commercial accounting conventions. With the advent of computerized accounting, nostros and vostros just need to have opposite signs within any one bank's accounting system; that is, if a nostro in credit has a positive sign, then a vostro in credit must have a negative sign. This allows for a reconciliation by summing all accounts to zero (a trial balance) – the basic premise of
double-entry bookkeeping Double-entry bookkeeping, also known as double-entry accounting, is a method of bookkeeping that relies on a two-sided accounting entry to maintain financial information. Every entry to an account requires a corresponding and opposite entry t ...
.


Typical usage

Nostro accounts are mostly commonly used for currency settlement, where a bank or other financial institution needs to hold balances in a currency other than its
home accounting unit A home, or domicile, is a space used as a permanent or semi-permanent residence for one or many humans, and sometimes various companion animals. It is a fully or semi sheltered space and can have both interior and exterior aspects to it. H ...
. For example: First National Bank of ''A'' does some transactions (loans, foreign exchange, etc.) in USD, but banks in ''A'' will only handle payments in AUD. So FNB of ''A'' opens a USD account at foreign bank Credit Mutuel de ''B'', and instructs all counter-parties to settle transactions in USD at "account no. 123456 in name of ''FNBA'', at ''CMB'', ''X'' Branch". FNBA maintains its own records of that account, for reconciliation; this is its ''nostro'' account. CMB's record of the same account is the ''vostro'' account. Now, FNBA sells AUD1,000,000 to ''C'' (a counterparty who has an AUD account with FNBA, and a USD account with CMB) for a net consideration of USD2,000,000. FNBA will make the following entries in its own accounting system: Over at CMB, they record the following transaction: If C does not have an account directly with FNBA's corresponding bank, the funds may be transferred within the banking system of country B by cheque or some form of
electronic funds transfer Electronic funds transfer (EFT) is the electronic transfer of money from one bank account to another, either within a single financial institution or across multiple institutions, via computer-based systems, without the direct intervention of b ...
(EFT). In this case CMB will make entries on several other accounts, such as a teller's receiving account, or a clearing account with the third bank holding C's account.


See also

*
Correspondent account A correspondent account is an account (often called a nostro or vostro account) established by a banking institution to receive deposits from, make payments on behalf of, or handle other financial transactions for another financial institution. Co ...


References

{{reflist


External links


Nostro Accounts in Forex Market
at GetHow
Vostro Accounts in Forex Market
at GetHow
Nostro Accounts - Definition
at Investopedia
Vostro Accounts - Definition
at Investopedia Banking terms