Clearing system

CHEQUES AND CHEQUE

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IX. Writing Practice. Make a short summary about assets and liabilities from the above text. Use the opening phrases from Appendix1.

UNIT 5. ASSETS AND LIABILITIES OF BANKS

UNIT 6.

DISCUSSION 1. What do you know about clearing of cheques?

2. What types of clearing do you know?

3. What are the advantages of the cheque clearing?

reading THE CHEQUE CLEARING SYSTEM

The mechanism of obtaining payment of cheques is called clearing. The origins of cheque clearing can be traced back to the 17th century. The first clearing house, where banks exchanged cheques, was set up in 1773 in a coffee shop in the City of London. The Clearing House still in operation deals with basic cheque clearing.

The basic principle behind clearing is that, rather than each bank branch presenting its cheques separately to every other bank branch for payment, each bank collects all the cheques it has received centrally from its branches and presents these as a total to the other banks as the paying banks. Settlement can be made on the net amounts due to or owed by each of the banks.

In Britain a cheque may be drawn anywhere without being taken to the bank. It may be given to a payee either directly or sent by post. No signa­ture of a bank official is needed. The payee sends or takes the cheque to his bank, which credits the amount to his account and sends the cheque to be presented to the drawer's bank through the clearing system. The payee's bank also prints the amount of the cheque in magnetic ink at the bottom.

The high street banks or clearing banks (the Big Five) are members of the clearing system. Every day the Clearing House clears millions of pounds' worth of cheques. Each cheque is fed into a machine, which reads

PART III. BANKING

the numbers in magnetic ink along the bottom. The Clearing House adds up the total amount each bank owes to each other bank and reconciles the difference in the banks' accounts with the Bank of England (the central bank of the UK). The cheque is then sent to the drawer's bank, which debits the drawer's account. This process, from the time when the payee pays the cheque into his/her bank until the cheque is debited to the drawer's bank account, takes three days.

Payment by some form of non-cash instrument, such as cheques, is so common in the UK that only 8% of the total money supply is in the form of notes and coins. People normally use cash only for small purchases so that banks do not have to keep much cash in circulation.

Sometimes the drawer's bank may decide not to honour a cheque. It may be because there is not enough money in the drawer's account or the cheque may be incorrectly written. In such cases the drawer's bank returns the cheque to the payee's bank marked with the words "Refer to drawer'.'

There are five different clearings in England and Wales and all are based in the City.

• General Clearing - cheques paid into banks to credit the payees' accounts have to be physically transferred back to the banks on which they are drawn. The exchange is effected at the Bankers' Clearing House and currently consists of 10 million cheques every working day.

• Credit Clearing - credits paid in at any branch of any bank are cleared in a similar way.

• Town Clearing - this operates only within the City and enables cheques to be cleared on the same day as they are paid in. This clearing is restricted to cheques of over 10,000 pounds which are drawn on, and paid into, specific bank branches within the City. Although the number of cheques passing through the Town Clearing daily is only a fraction of those of the General Clearing, their value is more than 20 times greater.

• BACS (Bankers' Automated Clearing Services) - this company deals with the electronic transfer of funds between banks. These include standing orders, direct debits and direct salary payments which number around 825 million each year. Because there is no paper involved they can be processed more rapidly than processing paper vouchers.

• CHAPS (Clearing House Automated Payments System) - is an extension of the Town Clearing and is a fully automated credit transfer system giving same day clearance of funds. The service is provided countrywide and it is run by the Clearing Banks. Other institutions such as merchant and foreign banks, large stockbrokers and solicitors can have their own terminals giving them direct access to one system via their own banks.

UNIT 6. CHEQUES AND CHEQUE CLEARING SYSTEM 195

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