What are nostro and vostro accounts, and how are they used in banking settlements?

Here is my explanation to highlight how a Nostro and a Vostro account works in the most simplified terms.

Nostro in Latin literally means ours and Vostro means yours.

Take a bank in Philippines, Bank D'Oro for example. BDO gets a lot many remittances and trade related money sent home from US to Philippines. However, BDO does not have a banking license in the US.

So BDO reaches out to a bank like Bank of America and asks them to open a bank account in BDO's name, in US dollars. On this, BDO can do all sorts of transactions as if they were themselves present in the US and operating this account.

This Nostro account has some specialities:

• The account was opened remotely. No one from BDO has to visit the US to open this.
• The Nostro (and Vostro) accounts are typically only a bank to bank arrangement, meaning, they can only be opened for banks.
• All money collected in the Nostro as per a pre-arranged schedule, ges pushed via SWIFT to the US Dollar pooled account at BDO in Manila.
• In some cases, Nostro accounts are receive only account, i.e. they will receive money from US customers, businesses and bank, but will not allow local payments, i.e. payout within the US from the same account.
• The account is in the currency of that country, so in this case, since the Nostro account is in the US, the currency is US Dollars, the BDO account is a US Dollar Nostro account with Bank of America.

Transaction Examples

Lets say there is a Money Transmitter in the US that is licensed and collects a lot of remittance payments in the US. This money transmitter has an arrangement with BDO for payout of the money collected in Philippines.

So everyday, the money transmitter takes the pooled US Dollars, and transfers the money in BDO's Nostro account with BOA. This money then snakes it way to Philippines where it is converted to Pesos and then distributed in the Philippines.

Another example is if a business payment needs to be made to Philippines, the two parties (US and Philippines) can agree that BDO's Nostro account can be used, and hence the deposit can be made in the Nostro account.

Another way to look at it is:

BDO's US Dollar Account in BOA is BDO's Nostro Account OR
BOA has a Vostro account for BDO in US Dollars with BOA.

When the tables are reversed, if BOA has an account with BDO in Philippines in Pesos, then for BDO this would be BOA's Vostro Account.