(a) Foreign banks maintain accounts in local currency abroad (known as vostro accounts from the local bank’s perspective or nostro accounts from the foreign bank’s perspective) to facilitate international payments, trade finance, and clearing operations without needing to convert currencies for every transaction. This enables efficient settlement of cross-border payments, supports correspondent banking relationships, and allows for local currency lending or investment. For example, a Ghanaian bank might maintain a GHS account with a US bank to handle remittances or trade payments in GHS without exchange risk exposure.

These accounts are funded through deposits from customers, interbank transfers, collections from bills or LCs, or borrowing in the local market. Operationally, they are managed via SWIFT for transfers, with balances monitored daily to avoid overdrafts. Debit/credit entries are made for payments, collections, or fees, and reconciliation is done regularly to comply with BoG directives on liquidity and anti-money laundering (e.g., Cyber and Information Security Directive 2020).

(b) Risks include:

• Currency risk: Fluctuations in exchange rates can erode asset value (e.g., post-DDEP impacts in Ghana 2022-2024).
• Liquidity risk: Inability to access funds due to market disruptions or BoG restrictions on capital flows.
• Credit risk: Counterparty default on settlements or overdrafts.
• Operational risk: Errors in reconciliation or fraud, as seen in the 2017-2019 Ghana banking cleanup (e.g., UT Bank collapse).
• Country/political risk: Economic instability or regulatory changes in the host country affecting asset value.

(c) Practical steps to manage such assets:

• Daily monitoring of balances using automated systems to maintain optimal levels and avoid idle funds or overdrafts, aligning with BoG Liquidity Risk Management Guidelines.
• Diversify holdings across multiple correspondent banks to reduce counterparty risk, as per Basel III principles adapted in Ghana.
• Use hedging tools like forward contracts or swaps to mitigate currency risk, ensuring compliance with BoG Capital Requirements Directive.
• Implement robust reconciliation processes and audit trails to detect fraud, in line with the Payment Systems and Services Act, 2019 (Act 987).
• Set limits on exposure per country/currency based on risk assessments, regularly reviewed under BoG Corporate Governance Directive 2018.
• Maintain contingency funding plans for liquidity crises, including access to BoG facilities.
• Conduct stress testing on assets for scenarios like exchange rate volatility or political events.
• Ensure AML/KYC compliance through transaction monitoring to prevent money laundering risks.
• Invest excess balances in short-term local instruments for yield, while adhering to recapitalization guidelines (e.g., BG/GOV/SEC/2023/05).
• Leverage fintech for real-time tracking, but outsource only with BoG approval under fintech regulations.