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From: JSchad
Affiliation:
Address:
Date: 12 Jul 2001
Time: 06:52:59
A nostro account is a bank account established in a foreign country for the purpose of holding that countries currency. Suppose a US bank purchases GBP. That currency has to be delivered somewhere, but US banks are only set up to maintain accounts in USD. The bank establishes a nostro account at a British bank and instructs its counterparty to deliver the GBP to that account.
If you maintain a nostro account for a foreign entity, you call it a vostro account. Vostro accounts are local accounts holding local currency serving as nostro accounts for foreign entities.
This stuff came into play in 1974 with the infamous failure of Germany’s bank Herstatt. On the day Germany regulators forced the bank into liquidation, it had commitments with US banks to deliver USD against DEM. The US banks delivered DEM from their German nostro accounts to Herstatt during German business hours. They had to wait for US banks to open before Herstatt could pay USD from its US nostro accounts. In the interim, German regulators shut down Herstatt, and the US banks didn’t receive their USD payments.
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