At SmartCapitalMind, we're committed to delivering accurate, trustworthy information. Our expert-authored content is rigorously fact-checked and sourced from credible authorities. Discover how we uphold the highest standards in providing you with reliable knowledge.
What is a Vostro Account?
A vostro bank account is an account that one party is holding for another party. In a vostro account, the administrators are not actually the owners of the money. They must keep this account solvent on behalf of its owner. Vostro account administrators, often banks, frequently pay interest to other parties for the use of their money.
Vostro accounts are just a way of talking about who owns the capital invested in them. To a customer who puts money into a bank account, that account is a “nostro” account, meaning that it belongs to that person. From the standpoint of the bank, it is a “vostro” account, meaning that it is not the bank’s own money, but the customer’s, and the bank bears a responsibility for good accounting of the customer’s money. This makes sense, since “voster” in Latin or “vuestra” in Spanish means “yours.”
A vostro account can be useful in the Forex, or foreign exchange, industries, where money needs to “go to market” in foreign markets and be traded into foreign currency, or alternately, kept as a foreign currency to that destination market. Parties holding vostro accounts are acting on behalf of their customers to get returns. This also happens in a wide variety of stock trading or stock options trading situations, where a broker is the party that holds the vostro account for clients.
In contrasting nostro and vostro accounts, those who are learning about finance find that these designations help to distinguish different kinds of banking systems, and information about who is the owner of invested money. In addition to these types of accounts, there is another one, again based on Latin/Italian etymology, called a “loro” account. This is also useful in talking about who owns a certain bank account.
A loro account is an account seen from the vantage point of a third-party. It is not “ours” or “yours” but rather, “theirs.” A loro account is an account held by one party, administrated by a second party, and audited or assessed by an outside interest. Loro accounts are most often used in syndicated financing, and are not common in many parts of the financial industry.
Although these kinds of accounts seem complicated, they’re really pretty simple. Labeling accounts helps to keep ownership issues straight. It also helps to provide incentive for the account holder to practice transparent and competent accounting.
AS FEATURED ON:
AS FEATURED ON:
-
![Man climbing a rope]()
Man climbing a rope
Discussion Comments
This article gives a very nice overview of vostro accounting. I give kudos to the author. I am a banker, and I would like to add a piece of advice for investors looking into opening a vostro account.
Always make sure that you do your own reconciliation accounting. Keep your own records of your withdrawals and deposits to make sure your account balance matches with what the bank statement says. Although banks usually have good internal record keeping systems, they are not perfect and mistakes do happen.
If your accounting is accurate and you see a discrepancy with the bank statement, contact the bank immediately. In most instances, the matter can be solved.
Like the article says, the bank is holding onto your money, not theirs. Take ownership of it and keep accurate records.
This article is very informative, thanks for posting it. Reading it makes me wonder if banks could use vostro accounts set up in foreign countries to grow money faster than it would if they had kept it in the domestic market.
For example, if the market for a country took a turn for the worst, could investor money in that country be transferred to a foreign account? Or, if interest rates were higher in another country, perhaps the owner of the account could have the bank invest the money in that better performing country.
It seems like a good investment strategy to me. There are probably a lot of legal regulations against it, though.
I remember first learning about vostro and nostro accounts in my undergraduate business classes. It might seem like a boring topic at first, or at least I thought it was. However, my professor was big on simulation and application, so he designed a project that allowed me and my fellow classmates to further our understanding of these accounts. Doing the project also helped me to see how interesting, and complicated, they could become.
Like the article mentions, vostro accounts are useful when working with a foreign currency. The professor designed an imaginary world and broke the class up into groups to represent the countries of this world. Each country had to set up a vostro account with at least three other countries, in hopes of expanding their business into foreign markets. It was a pretty simple concept, but actually doing it made me really understand it.
Thanks for writing this article. It brings back pleasant memories.
Thanks for this article. I am a current finance student in an MBA program, and I will definitely be using this article as a reference for my next exam.
When I first started learning about vostro and nostro accounts, I was very confused. The concepts behind the accounts were not hard to understand, but the nomenclature confused me at first.
My professor taught us that these accounts were always categorized using the point of view of the bank. For example, here is how these terms would be defined if the bank was speaking:
If money is being held by us and it belongs to you, then it is a vostro account.
If money is being held by you and it belongs to us, then it is a nostro account.
I hope my post helps to clear up some confusion for any other student out there. Once you can grasp the correct terminology, understanding the rest is pretty straightforward.
Post your comments