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A Vostro account is an account that a domestic bank often called a correspondent bank holds on the behalf of a foreign bank. In a Vostro account, a local currency account can be managed and held by a domestic bank on behalf of a foreign correspondent bank.
A Vostro account is used in the context of correspondent banking, another similar term is a Nostro account. Nostro and Vostro accounts are accounts held by an entity on behalf of a corresponding entity. Under a Vostro account, a domestic bank holds the funds in the account and manages them for another bank, usually a foreign entity.
A Little More on What is a Vostro Account
Vostro accounts are not restricted to banks, they can be used by other entities such as insurance companies and business entities to keep funds with another entity. For instance, an insurance company outside of the United States can approach an insurance company in the United States to hold and manage some funds on their behalf. When Vostro accounts are used by corresponding banks, the domestic bank can execute transfers, deposits, and withdrawals on behalf of the corresponding bank.
Nostro and Vostro accounts describe accounts which are by domestic banks or entities on behalf of the corresponding foreign counterparts and vice versa. Both Nostro and Vostro are Latin words that mean “ours” and “yours” respectively.
Vostro Accounts in an Agency Relationship
The idea behind a Vostro account is the intention of banks and entities to have a physical presence in all countries. For example, a bank operating in the United States will still want to be able to operate in Japan, Spain, China, the United Kingdom, and other parts. This is made possible through a Vostro account.
A Vostro account allows a bank in another country to establish a relationship with a domestic bank to keep funds of the foreign bank and manage the funds on their behalf. This type of relationship makes the two banks corresponding banks, which means customers of a domestic bank can withdraw, transfer or deposit funds in the corresponding bank. The funds held by a domestic bank on behalf of the foreign bank are often in their local currency.
Vostro Accounts in an Intermediate Relationship
Holding and managing of Vostro accounts often attract a fee, if a domestic bank pays a certain amount to the customer of a foreign bank in their local currency, an applicable fee is charged.
Vostro accounts also confer intermediary roles on the corresponding banks which allows a domestic bank to execute transfers between a foreign bank and another domestic bank they have no direct relationship with. When domestic banks and vice versa act in this capacity, a certain fee is deducted from the money wired.
References for “Vostro Account”
Academic research for “Vostro Account”
TWO-CURRENCY, NOSTRO AND VOSTRO ACCOUNTS: HISTORICAL NOTES, 1400–1800, Yamey, B. S. (2011). TWO-CURRENCY, NOSTRO AND VOSTRO ACCOUNTS: HISTORICAL NOTES, 1400–1800. Accounting Historians Journal, 38(2), 125-143.
An Italian Account of Thomas More’s Trial And Execution, Wheeler, T. (1970). An Italian Account of Thomas More’s Trial And Execution. Moreana, 7(2), 33-39.
Nostro and Vostro accounts–effective tool for cross border settlement, Akshatha, B. G., & Akash, S. B. (2014). Nostro and Vostro accounts–effective tool for cross border settlement. ZENITH International Journal of Multidisciplinary Research, 4(2), 37-41.
Issues on Islamic Banks’ Nostro Accounts, Alwi, S. F. S., Ibrahim, U., & Sawari, M. F. (2017). Issues on Islamic Banks’ Nostro Accounts. Terengganu International Finance and Economics Journal (TIFEJ), 3(2), 70-78.
Can Ripple disrupt the global payments market?, Harðarson, A. (2018). Can Ripple disrupt the global payments market? (Doctoral dissertation).