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 ofTypical 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. 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 ofSee also
* Correspondent accountReferences
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