Nostro Account: Definition, Function and How it Works

Last updated on February 20th, 2025 at 10:28 am

In the world of banking, the term "Nostro account" plays a crucial role in supporting international transactions. With a specific purpose and a structured mechanism, Nostro accounts become a key element in facilitating cross-border trade. Let’s take a deeper look at the definition, functions, examples, and working mechanisms of Nostro accounts.

What is a Nostro Account?

A Nostro account is a type of bank account held by a bank in one country in the currency of another country. The term "Nostro" comes from Latin, meaning "ours." In this context, the account allows a bank to hold and manage funds in a foreign currency at another bank.

What is a Third-Party Account?

A third-party account, also known as a "Loro" account, refers to a bank account held by a bank in one country at another bank in the currency of that country. Its main function is to simplify international transactions and facilitate the storage of funds in foreign currencies.

What is a Nostro Debit?

A Nostro debit occurs when the bank that owns the Nostro account withdraws or removes funds from that account. This can happen, for instance, when the bank settles a transaction or pays a liability to another bank.

Functions of a Nostro Account

A Nostro account functions as a tool to facilitate international transactions and hold funds in foreign currencies. The bank that owns the Nostro account can more efficiently handle cross-border transactions and meet payment obligations in foreign currencies.

How Does a Nostro Account Work?

The operation of a Nostro and Vostro account essentially refers to the same entity, but from different perspectives. For example, when Bank X holds an account in Bank Y in the currency of Bank Y, Bank X calls it a Nostro account, meaning "our account in your books." On the other hand, Bank Y refers to it as a Vostro account, meaning "your account in our books."

The purpose of this account is to simplify international transactions and settle payments while managing foreign exchange risk.

Before the introduction of the euro as a settlement currency on January 1, 1999, every bank had to hold a Nostro account in each country that eventually adopted the euro.

However, after that date, a single Nostro account for the entire eurozone became sufficient. In cases where a country exits the eurozone, whether voluntarily or not, banks must reopen Nostro accounts in that country with the new currency to continue facilitating payments.

Read Also: Vostro Account

Example of a Nostro Account

The following illustration explains the steps in making a payment using a Nostro account. For example, Bank A in the United States (US) enters into a spot foreign exchange contract to buy British pounds from Bank B, based in Sweden.

On the settlement date, Bank B is required to transfer pounds from their Nostro account in the UK to Bank A’s Nostro account, also located in the UK. Simultaneously, Bank A must make a payment in US dollars to Bank B’s Nostro account.

Is a Nostro Account the Same as a Checking Account?

You might wonder if a Nostro account is the same as a checking account. The answer is no. A Nostro account and a checking account have distinct differences.

A Nostro account is a bank account in a foreign currency held at a foreign bank, while a checking account is a bank account in the national currency held at a domestic bank.

What Does Nostro Stand For?

Nostro is derived from the Latin word meaning "ours." This type of account is primarily used to facilitate foreign exchange transactions and international trade efficiently.

Are There Fees Associated with a Nostro Account?

Yes, fees are associated with Nostro accounts. However, the fees charged on a Nostro account can vary depending on the agreement between the account-holding bank and the correspondent bank. Some fees that may arise include administrative fees, maintenance fees, and fees for international transactions.

By understanding the concept and functions of a Nostro account, we can appreciate its vital role in supporting global economic activities.

From the examples provided to the understanding of how it works, a Nostro account forms a solid foundation for the international banking system.

Overall, the use of Nostro accounts not only reflects the evolution of financial technology but also represents the close relationships between countries in carrying out secure and efficient financial transactions.