Vostro Accounts Explained

Key takeaways
* A vostro account is an account a foreign (correspondent) bank holds on behalf of a domestic (respondent) bank, denominated in the correspondent bank’s local currency.
* Vostro and nostro are mirror terms reflecting each bank’s perspective: vostro = “your” (from the correspondent’s view); nostro = “our” (from the respondent’s).
* Vostro accounts enable cross-border services—wire transfers, currency conversion, trade settlements—without a bank needing a physical branch abroad.
* They reduce transaction costs, support regulatory compliance (KYC/AML), and require detailed reporting; balances may not have standard deposit insurance.

What is a Vostro account?

A vostro account is a banking arrangement in which a correspondent (foreign) bank holds and manages funds on behalf of a domestic respondent bank. The account is viewed from the correspondent bank’s perspective and is usually maintained in the correspondent bank’s local currency to facilitate local payments and settlements.

How it works

• The respondent bank instructs or funds the correspondent bank’s vostro account to enable payments, withdrawals, or other services in the foreign market.
• The correspondent bank executes local transactions (wires, cash withdrawals, FX conversions) on behalf of the respondent bank or its customers.
• The correspondent bank charges fees for services and provides regular reporting on transactions and balances.
• Both banks perform due diligence and comply with local and international regulations (KYC, AML, reporting).

Vostro vs. Nostro

• Vostro (Latin: “your”): the correspondent bank’s record of funds held for another bank, in the correspondent’s local currency.
• Nostro (Latin: “our”): the respondent bank’s record of its own funds held at a correspondent bank, in the correspondent’s currency.
  These terms describe the same relationship from opposite viewpoints.

Common uses

Vostro accounts are commonly used for:
* International trade settlements and trade finance.
* Cross-border remittances and local payment processing.
* Foreign currency transactions, hedging, and FX trading.
* Cost mitigation by avoiding multiple cross-border conversions and reducing transfer expenses.
* Ensuring compliance with local regulations through correspondent bank services.

Agency and intermediary roles

• Agency relationship: The correspondent bank may act as an agent or fiduciary, performing agreed-upon services (cash handling, payment execution, customer withdrawals) where the respondent bank lacks physical presence.
• Intermediary role: When two banks do not have a direct relationship, a correspondent bank uses a vostro account to intermediate wire transfers—receiving funds, deducting fees, and forwarding payments to the final recipient.

Example transaction (step-by-step)

1. A customer of the respondent bank requests a withdrawal or foreign payment.
2. The respondent bank transfers the required amount (plus fees) to its vostro account held at the correspondent bank.
3. Funds are converted to the local currency if needed.
4. The correspondent bank debits the vostro account, executes the local payment, and pays the customer or receiving bank, less applicable fees.
5. The correspondent provides a transaction report to the respondent bank.

Reporting, compliance, and insurance

• Banks must keep detailed records and report transactions to meet local regulatory requirements and international AML/KYC standards.
• Vostro account activity is subject to scrutiny to prevent illegal activity and ensure transparency.
• Vostro balances typically represent liabilities of the respondent bank and are often not covered by local deposit insurance schemes; coverage varies by jurisdiction.

Benefits for banks

• Extend services internationally without opening branches.
• Offer local-currency services to customers abroad.
• Lower transaction and FX costs.
• Access local payment networks and regulatory channels.
• Manage currency and settlement risks more efficiently.

FAQs

Q: Who holds a vostro account?
A: A correspondent (foreign) bank holds the account on behalf of a respondent (domestic) bank.

Q: What transactions pass through a vostro account?
A: Fund transfers, local payments, FX conversions, trade settlements, and collection of local currency funds.

Q: Are vostro account balances insured?
A: Generally no; insurance depends on jurisdiction and the nature of the liability. Check local regulations.

Q: What regulations apply?
A: KYC, AML, and local reporting obligations apply; both banks must conduct due diligence and comply with relevant laws.

Bottom line

Vostro accounts are essential tools in correspondent banking, enabling banks to provide local-currency services and execute cross-border payments without a physical presence. They reduce costs and improve access to foreign markets while requiring strong compliance, reporting, and careful risk management.