Definition of Clearing HouseClearing 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 CenturyIn the decade before the Clearing House was founded, banking had become increasingly complex. From 1849 to 1853 years highlighted by theCalifornia gold rushand 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 theWall Streetbanks 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 panicsBetween 1853 and 1913, the nation experienced rapid economic expansion as well as ten financial panics. One of the Clearing Houses first challenges was thepanic 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 thepanic of 1873, and continued to be used as a substitute currency among the member banks for settlement purposes during panics in subsequent decades, including thePanic 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 theFederal 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 todaySince 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 theFederal Reserve Bank of New Yorkto 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.