how a nostro account works
a nostro account and a vostro account actually refer to the same entity but from a different perspective for example bank x has an account with bank y in bank y s home currency to bank x that is a nostro meaning our account on your books while to bank y it is a vostro meaning your account on our books these accounts are used to facilitate international transactions and to settle transactions that hedge exchange rate risk prior to the advent of the euro as a currency for financial settlements on jan 1 1999 banks needed to hold nostro accounts in all the countries that now use the euro 1since that date one nostro account for the entire eurozone has been sufficient if a country were to leave the eurozone either voluntarily or involuntarily banks would need to re establish nostros in that country in its new currency to continue making payments most large commercial banks worldwide hold nostro accounts in every country with a convertible currency example of a payment using a nostro accountthe following example illustrates the process of making a payment using a nostro account bank a which is in the u s enters into a spot foreign exchange contract to buy british pounds from bank b which is in sweden on the settlement date bank b must deliver pounds from its nostro account in the u k to the nostro account of bank a also in the u k on the same day bank a must pay dollars in the u s to the nostro account of bank b limitations on nostro accountsthe central banks of many developing countries limit the buying and selling of their currencies usually to control imports and exports and to control the exchange rate banks generally don t hold nostro accounts in those countries as there is little or no foreign exchange business 