Effective Product Control

CHAPTER 19Controlling Nostros

As every bank needs nostros to settle their transactions, well-controlled nostros are a key ingredient for a successful bank. In this chapter, we will explore what a nostro is and examine the controls a bank has in place to safeguard their cash.

Introduction to Nostros

Nostros for banks are akin to the savings accounts that you and I have, to receive our salary payments into and pay our living expenses from. A bank will require a nostro for each currency they trade in, which will be held with depository institutions (other banks). These accounts are known as vostros from the depository institution's side.

Nostros attract interest and fees which vary depending on the balance. When nostros have surplus funds (and interest rates are not negative), interest is usually paid to the customer by the depository institution. When nostros are overdrawn, interest and possibly overdraft fees are levied against the customer.

As the interest received on surplus funds is generally very low, the bank's treasury will fund nostros in a way that avoids being overdrawn, whilst not leaving too much surplus cash that attracts a low interest rate.

Table 19.1 illustrates a collection of nostros for Sparta Bank, which has six bank accounts in six different currencies. As Sparta Bank has a legal entity and banking licence in the United Kingdom, they can hold their GBP cash within their own bank. There are three sources of nostro account balances, which are illustrated ...