Nostro and vostro accounts

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.

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.[1]

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 of electronic funds transfer (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.