Understanding Nostro Accounts: Banking Abroad in Foreign Currencies

Key takeaways

• A nostro account is a bank’s account held in a foreign bank in the foreign currency.
• It simplifies international payments, foreign exchange settlement, and trade transactions.
• Nostro accounts are used by banks, businesses, and governments — not individual retail customers.
• They are typically maintained in major convertible currencies (USD, EUR, JPY, etc.) and usually incur maintenance fees.
• The counterpart term is vostro: what is a nostro to one bank is a vostro to the correspondent bank.

What is a nostro account?

A nostro account is “our account on your books”: a domestic bank’s account held at a foreign bank and denominated in the foreign bank’s currency. Banks use nostros to receive and make payments in that currency, reducing the need for on-the-spot conversions and helping manage exchange-rate and settlement risk.

How nostro and vostro relate

• Nostro — the perspective of the account holder: our account held at your bank in your currency.
• Vostro — the perspective of the correspondent bank: your account held on our books in our currency.

Both terms describe the same ledger entry from opposite viewpoints and underpin correspondent banking relationships that enable cross-border payments.

How they work (mechanics)

• A domestic bank opens an account with a foreign bank and holds balances in the foreign currency.
• When the domestic bank needs to make payments in that currency, it instructs the foreign bank to debit its nostro and credit the beneficiary.
• Correspondent banks may be used where a direct nostro relationship is absent, especially in jurisdictions with restricted currency controls.
• Since the euro’s introduction, one euro-denominated nostro can cover the entire eurozone, whereas previously banks needed separate nostros in each national currency.

Example: payment settlement using nostro accounts

1. Bank A (U.S.) agrees to buy British pounds from Bank B (Sweden).
2. On settlement date, Bank B transfers pounds from its U.K. nostro to Bank A’s U.K. nostro.
3. Bank A simultaneously transfers U.S. dollars in the U.S. to Bank B’s U.S. nostro.
   This coordinated movement of balances enables cross-currency settlement without requiring immediate currency conversion at each step.

Challenges and restrictions

• Currency controls: Central banks in some countries restrict foreign currency trading; banks often avoid maintaining nostros in such jurisdictions.
• Correspondent dependence: Where a bank lacks a direct nostro, it must rely on correspondent banks, which can increase cost and complexity.
• Operational and compliance burdens: Maintaining multiple foreign accounts increases regulatory reporting, anti-money-laundering checks, and operational overhead.
• Fees: Nostro accounts typically carry maintenance and transaction fees that can be substantial.

Who can hold nostro accounts?

Nostro accounts are tools for banks, corporate treasuries, and governments for managing international payments and liquidity. They are not offered to retail individual customers.

Differences from regular deposit accounts

• Traditional demand deposit accounts are held in the currency of the bank where the account sits.
• Nostro accounts specifically hold balances in a foreign currency and exist to facilitate cross-border transactions and FX settlement.

Bottom line

Nostro accounts are a foundational element of international banking and correspondent relationships. By holding foreign-currency balances at foreign banks, institutions can execute and settle cross-border payments more efficiently, manage currency exposure, and support international trade — albeit with added costs and regulatory complexity.