Nostro and Vostro Account
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Nostro and Vostro (Middle Italian, from Latin, noster and voster; English, ours and yours) are accounting terms used to distinguish an account you hold for another entity from an account another entity holds for you. The entities in question are almost always, but need not be, banks.
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[edit] Origins
It helps to recall that the term account refers to a record of transactions, whether current, past or future, and whether in money, or shares, or other countable commodities. Originally a bank account just meant the record kept by a banker of the money they were holding on behalf of a customer, and how that changed as the customer made deposits and withdrawals (the money itself probably being in the form of specie, such as gold and silver coin).
Some customers will keep their own records of their transactions, for instance, so they can check for errors by the bank. That record kept by the customer is also an account, of the money the bank is holding for them. And when that customer is another bank, since they also keep other accounts (of the money they are holding for their customers) there is a need to clearly differentiate between these two types of accounts.
The terms Nostro and Vostro remove the potential ambiguity when referring to these two separate accounts of the same balance and set of transactions. Speaking from the bank's point-of-view:
- A Nostro is our account of our money, held by you
- A Vostro is our account of your money, held by us
Note that all "bank accounts" as the term is normally understood, including personal or corporate chequing, loan, and savings accounts, are treated as Vostro's by the bank. They also regard as Vostro purely internal funds such as Treasury, Trading and Suspense accounts; although there is no "you" in the sense of an external customer, the money is still "held by us".
Interestingly, a bank customer who keeps a parallel record of their chequing account or credit card at home in order to, say, verify their statements, is in theory keeping a Nostro account.
[edit] Accounting
[edit] Conventions
A bank counts a Nostro account with a credit 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 computerised accounting, Nostro's and Vostro's just need to have opposite signs within any one banks 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.
[edit] 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.
For example: First National Bank of A does some transactions (loans, foreign exchange, etc.) in B$, but banks in A will only handle payments in A$. So FNB of A opens a B$ account at foreign bank Credit Mutuel de B, and instructs all counter-parties to settle transactions in B$ 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 A$1,000,000 to C (a counterparty who has an A$ account with FNBA, and a B$ account with CMB) for a nett consideration of B$2,000,000. FNBA will make the following entries in its own accounting system:
| (Internal) FX A$ Trading Account | 1,000,000 DR | A$ Account in name of C | 1,000,000 CR |
| B$ Nostro at CMB (FNBA's Nostro) | 2,000,000 DR | (Internal) FX B$ Trading Account | 2,000,000 CR |
Over at CMB, they record the following transaction:
| B$ Account in name of C | 2,000,000 DR | B$ Account in name of FNBA (FNBA's Vostro) | 2,000,000 CR |
[This is somewhat simplified; in reality C may not have an account with FNBA's corresponding bank, and will make settlement by cheque or some form of 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 that the cheque was written on.]
[edit] Related Expressions
There is also the notion of a Loro account ("theirs"), which is a record of an account held by a 2nd bank on behalf of a 3rd party; that is, my record of their account with you. In practice this is rarely used, the main exception being complex syndicated financing.
[edit] External links
- Gladstone - Example of a Nostro and Vostro Account
