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Bank Clearing Systems

Overview

Like telephone exchanges, water pumping stations, and electricity grids, bank clearing systems are an essential part of a modern economy which operates quietly in the background to enable the economy to operate efficiently.  The clearing systems are owned and operated by the banks.  Most countries have one or more "clearing houses" (see below) - Ireland does not.  Some changes may arise in the Irish clearing system as the SEPA project develops.

Definitions and Glossary

Following are the definitions from BIS - Bank for International Settlement

 

Definition

Clearing

the process of transmitting, reconciling and, in some cases, confirming payment orders or security transfer instructions prior to settlement, possibly including the netting of instructions and the establishment of final positions for settlement. Sometimes the term is used (imprecisely) to include settlement.

Automated Clearing House (ACH)

 an electronic clearing system in which payment orders are exchanged among financial institutions, primarily via magnetic media or telecommunications networks, and handled by a data processing centre. See also clearing/clearance.

Pan-European Automated Clearing House (PEACH)

An automated clearing house for the Eurozone

Settlement

the completion of a transaction, wherein the seller transfers securities or financial instruments to the buyer and the buyer transfers money to the seller. A settlement may be final or provisional.

 What does clearing do?

If an Ulster Bank cheque is lodged in AIB on Monday, then AIB credits the payees account.  It must get funds from Ulster to balance it's books.  So on Tuesday, AIB will hand over the cheque (with lots of others) to Ulster and demand payment.  At the same time, Ulster will hand over a bundle of cheques to AIB for payment.  Each bank has no advance notice of the amount of cheques which it may be presented with - and the amounts may be very large on any individual day.  So it is allowed a small amount of time to assemble funds to make the payment.  The only form of payment that is acceptable between banks to settle for these cheques is a payment drawn on the Central Bank. 

There are very tight rules in relation to the exchange and settlement processes between banks, and only banks conforming to these rules are allowed to participate directly.  Such rules are designed to protect the integrity of the system, and in turn, to protect the banks.  Without such integrity, there would be a danger that if one bank were to collapse, a domino effect could trigger the collapse of others.

There are 5 primary forms of clearing for payments within Ireland and 3 forms of product-specific clearing

Clearing

Types of items cleared

Responsible body  - all of the bodies listed below are autonomous companies operating under the umbrella of IPSO

Paper debit clearing

Cheques, drafts, warrants

Irish Paper Clearing Company Ltd

Paper credit clearing

Paper credit Transfers, Giros

do

Electronic Credit Clearing

Salary credits, other electronic credit transfers

Irish Retail Electronic Payments Clearing Company Ltd

Electronic Debit Clearing

Direct Debits, other miscellaneous electronic debits

do

Real-time Gross Settlement (RTGS)

Urgent payments (mainly large payments) between banks

TARGET2 (Frankfurt-based Europe-wide RTGS system)

There is no clearing house infrastructure in Ireland.  All of the above clearings except RTGS are operated by direct bilateral exchange (physical or electronic). 

Participants in Clearing

The 8 direct participants in paper clearing are:-

  • AIB
  • Bank of Ireland
  • BNP Paribas Dublin Branch
  • Central Bank & Financial Services Authority of Ireland
  • Bank of Scotland Ireland
  • National Irish Bank
  • permanent TSB
  • Ulster Bank Ireland Ltd

The seven direct participants in electronic clearing are:-

  • AIB
  • Bank of Ireland
  • BNP Paribas Dublin Branch
  • Bank of Scotland Ireland
  • National Irish Bank
  • permanent TSB
  • Ulster Bank Ireland Ltd

Laser Card Services Ltd the company which owns the Laser brand and controls the Laser scheme.  The list of owners is no longer published, but includes:-

  • AIB
  • Bank of Ireland
  • EBS Building Society
  • First Active Plc
  • National Irish Bank
  • permanent TSB
  • Ulster Bank Ireland Ltd

Other Clearing

Additionally, there are clearing arrangements for payments by credit cards, and for ATM transactions.

1.     Credit card transactions are cleared through the relevant Visa or Mastercard networks or through payment processing companies linked to them.  Settlement is done through one of the clearings listed above.

2.     The ATM networks of banks are linked to provide authorisation and clearing

Euro cross-border payments in Europe

In recent years, following the introduction of regulation 2560 (which limits charges for certain euro payments across EU borders) the banks have been forced to consider cheaper and/or more efficient ways to clear euro transactions.  PEACH (Pan-European ACH) is the embryo of a Pan-European clearing system, linking the clearing systems within the EU for euro transactions.  PEACH is operated by EBA.  Through links with banks and clearing systems throughout Europe, PEACH should be able transfer credits to any bank in Europe in a 4-day clearing cycle (i.e. a credit submitted on Monday in Bank A in country B should be delivered to Bank C in country D on Thursday at the latest). Under the Payment Services Directive, the clearing time for euro transactions will be reduced to one day from 2012.

Foreign items

There are few formal clearing arrangements for clearing of foreign payments, either outgoing or incoming payments.  More usually, there are bilateral arrangements between major banks in Ireland and major banks in foreign capitals.  These arrangements typically provide a range of facilities:-

  • International Credit transfer
  • Foreign Drafts
  • Collection of foreign items

In general, such facilities are slow and expensive - the fastest service is the international credit transfer.

Collection arrangements mean that the collecting bank will seek payment from the originating bank, and will only credit the payees account when the payees bank has actually received funds in payment.

The Future of Clearing

Under the SEPA (Single Euro Payment Area) project, an integrated Eurozone-wide clearing arrangement was envisaged and may come to fruition at a future date.  Clearing arrangements in Ireland may change in line with this development.  In effect, this might mean that some or all of clearing is done outside the state.

There is general agreement among bankers and the EU that cheques must be phased out and be replaced by electronic transactions.  If this happens, the paper clearing must scale down and/or eventually close.