Interbank Deposits: What They Are and How They Work

Key takeaways
* An interbank deposit is an arrangement in which one bank holds funds on behalf of another and records the amount in a payable ledger account.
* The holding bank opens a “due to” account for the depositing (correspondent) bank. For cross‑border deposits the accounts are called nostro (our) and vostro (your).
* Interbank activity is primarily short‑term and used by banks to manage liquidity, meet reserve requirements, and facilitate large institutional transactions.
* Interbank rates on these deposits and short loans are typically the lowest available and depend on maturity, market conditions, and creditworthiness.

What is an interbank deposit?

An interbank deposit occurs when one financial institution places funds with another and the receiving bank records the obligation in its general ledger. These deposits happen within the interbank market, a network where banks and large financial institutions trade currencies, lend, and borrow among themselves. Retail customers are not participants in this market.

How interbank deposits work

• The depositing bank is often called the correspondent bank; the receiving bank is the holding bank.
• The holding bank opens a “due to” account — a payable account that reflects funds owed to the depositing bank.
• Transactions are usually short‑term (overnight to a few days) and may be part of broader interbank lending used to manage daily liquidity needs and satisfy regulatory reserve requirements.
• Interest on these deposits and short loans is set at the interbank rate, which varies by term length, prevailing market conditions, and the institutions’ credit ratings.

Correspondent banking, nostro and vostro accounts

When interbank deposits cross national borders, terminology shifts:
* Nostro account (Latin for “ours”): from the perspective of Bank A, this is its account held at a foreign Bank B — “our account on your ledger.”
* Vostro account (Latin for “yours”): Bank B’s accounting label for Bank A’s funds — “your account on our ledger.”
Example: If Bank A (home country) places funds with Bank B (foreign), Bank A calls that balance its nostro account; Bank B calls it a vostro account.

Why banks use interbank deposits and loans

• Liquidity management: banks borrow to cover shortfalls and lend excess cash to earn a return.
• Reserve compliance: interbank transactions help meet mandatory reserve requirements.
• Market functioning: they provide liquidity to the financial system and enable large institutional and foreign‑exchange operations.

How interbank deposits differ from ACH transfers

• ACH transfers are retail or business payment rails used by individuals and companies to move money; they typically route through clearing systems.
• Interbank deposits are direct arrangements between financial institutions and do not involve retail payment networks.

Common question: What is a “due to” account?

A “due to” account is the holding bank’s payable ledger entry that records funds owed to the correspondent (depositing) bank. It tracks the balance until the funds are returned or otherwise settled.

Bottom line

Interbank deposits are ledger arrangements through which banks hold each other’s funds to manage liquidity and meet regulatory and operational needs. They are a foundational element of the interbank market, rely on short‑term lending and low interbank rates, and use specific accounting terms (due to, nostro, vostro) to record cross‑institution balances.