Definition of Clearing House
Clearing House is a place or an institution where mutual claims and accounts are settled as
between banks. Clearing house ordinarily has to perform only the function of settling the
differences between banks at the end of each clearing or at the end of each day.
According to Dictionary Of Banking and Finance ,Clearing House is a place where
representative of the banks in the same locality meet each day at an agreed time to exchange
cheques drafts and drawn on each other and to settle in resulting balances.
Oxford Dictionary of Business has to said, Clearing House is a centralized and computerized
system for settling indebtedness between members.
Professor Sayers has to say that, The interbank indebtness arising from the transfer of deposit
from one person to another is made by bankers clearing house.
Bankers clearing house is an organization that transfers money between member banks originally
to clear cheques.
In fine saying that clearing house is place where settling inter banking indebtness and claims
arising from cheques, bank drafts, and bills under the custody of central bank.
Origin of the Clearing System
The New York Clearing House depicted in the 19th Century
In the decade before the Clearing House was founded, banking had become increasingly
complex. From 1849 to 1853 years highlighted by the California gold rush and construction of a
national railroad systemthe number of New York banks increased from 24 to 57. Settlement
procedures were unsophisticated, with banks settling their accounts by employing porters to
travel from bank to bank to exchange checks for bags of coin, or specie. As the number of
banks grew, exchanges became a daily event. The official reckoning of accounts, however, did
not take place until Fridays, often resulting in record keeping errors and encouraging abuses.
Each day, the porters would gather on the steps of one of the Wall Street banks for their Porters
Exchange.
In 1853, a bank bookkeeper named George D. Lyman proposed in an article that banks send and
receive checks at a central office. There was a positive response and The New York Clearing
House was organized officially on October 4 of that year. One week later, on October 11 in the
basement of 14 Wall Street, 52 banks participated in the first exchange.
On its first day, the Clearing House exchanged checks worth $22.6 million. Within 20 years, the
average daily clearing topped $100 million. Today, the average is in excess of $20 billion.
The formation of the New York Clearing House brought order to what had been a tangled web of
exchanges. Specie certificates soon replaced gold as the means of settling balances at the
Clearing House, further simplifying the process. Once Clearing House certificates were
exchanged for gold deposited at member banks, porters encountered fewer of the dangers they
had faced previously while transporting bags of gold from bank to bank. Certificates also
relieved the strain on the banks cash flow, thus reducing the likelihood of a run on deposits.
Requirements placed on member banksweekly audits, minimum reserve levels and daily
settlement of balancesfurther assured more ordered, efficient exchanges.
Calming the panics
Between 1853 and 1913, the nation experienced rapid economic expansion as well as ten financial panics.
One of the Clearing Houses first challenges was the panic of 1857. When the panic began, leaders of the
member banks met and devised a plan that would shorten the duration of the panicand more importantly,
maintain public confidence in the banking system. When specie payments were suspended, the Clearing
House issued loan certificates that could be used to settle accounts. Known as Clearing House Loan
Certificates, they were, in effect, quasi-currency, backed not by gold but by discounted county and state bank
notes held by member banks. Bearing the words Payable Through the Clearing House, a Clearing House
Loan Certificate was the joint liability of all the member banks, and thus, in lieu of specie, a most secure form of
payment.
The certificates appeared in smaller denominations during the panic of 1873, and continued to be used as a
substitute currency among the member banks for settlement purposes during panics in subsequent decades,
including the Panic of 1893. Although they represented a potential violation of federal law against privately
issued currencies, these certificates, as a contemporary observer noted, performed so valuable a servicein
moving the crops and keeping business machinery in motion, that the governmentwisely forbore to
prosecute.
In 1913, Congress passed the Federal Reserve Act, thus creating an independent, federal clearing system
modeled on the many private clearing houses that had sprung up across America. The new monetary system,
with its stringent audits and minimum reserve standards, assumed the role that clearing houses had played in
offsetting the nations fears of future panics.
The clearing process today
Since the inception of the Federal Reserve System, the New York Clearing House has concentrated on
facilitating the smooth completion of financial transactions by clearing the payments involved. The clearing
process, while highly structured, is in theory, quite simple. Member banks exchange checks, coupons and other
certificates of value among themselves, after which the Clearing House records the resulting charges to their
accounts. Entries are posted on the books of the Federal Reserve Bank of New York to settle any differences.
Settlement is prepared each business day at 10:00 a.m. after approximately three million pieces of paper have
been presented for payment. In recent decades computers have been performing the payment clearing that
once required paper processing. The Clearing House Interbank Payments System, or CHIPS, began operation
in 1970. The New York Automated Clearing House, or NYACH, followed in 1975 and became the Electronics
Payment Network in 2000. The Clearing House Electronic Check Clearing System, or CHECCS, was added in
1992.
