The Bankers Clearing System.

The bankers Clearing System.

When two persons  bank with  the same  branch  bank , a cheque  drawn  by one  in favour  of the  other  is cancelled  by transfer  of the amount  in the books  of the branch  from the drawer’s  account  to the payee’s account  that is  by mere  book entry. The transfer of funds  which takes  place  when debtor  and creditor  bank  with different  banks  in different towns  will now  be considered. The object  of using  cheques  is to avoid  the transfer  of coin or notes  and the illustration will also show  in a simplified  way  how  this is done. An example is illustrated below in the diagram, lets assume  that  Clinton banks  with  the  Midwest bank Ltd, Southampton  and owes  a sum  of money to Trump , who banks  with First bank  Ltd, Manchester.                               

    

“It should be observed that Mr. Clinton the drawer may request  the return  of his cheque  from  his branch  bank;in London  cheques  are usually  returned  to the  drawer; in provinces , only cheques  embodying a form  of receipt  are normally  returned without a request.”

A clerk in the First bank  Manchester  will list  and make  a bundle  of all cheques  drawn  on the Midwest bank including  Clinton’s  cheque  received  that day , another  list  and  bundle  for those  drawn  on Lloyd’s  and so on  for each member  bank  of the clearing  House. Banks  that are not  members  of  the clearing house appoint  a bank  that is to act  as their  clearing agent and cheques  drawn on these  non-member banks  are added  to the bundle  of the clearing  Bank  appointed  as  agent. These bundles  of cheques  termed  “CHARGES” with  the respective  lists  are all sent  the same  day  to the head  office  of  First bank in London.

At  the head office  all the bundles  of cheques  drawn  on  the Midwest  bank  or for which  the Midwest bank  acts  as  clearing agent received  from the branches  and by  the head  office  itself  will be placed  together  and a total  be made  of  the separate lists.  A total  will also be  be made of all cheques  drawn by the Lloyd’s bank  and on each  of the other  clearing  bankers- a separate  bundle  and total  for each. The next step is to enter these totals on the left hand side  of a form bearing  the names  of each  clearing  banker  printed  one after the other  in column , each separate  total  against the  clearing  banker to which it relates.The total of this column is the amount  owed  to the First bank  by the other members  of the clearing house  on that day’s clearing. This total  is known  as the First bank ‘s out clearing. Next day  the  bundles  of charges  are taken  to the clearing  house  by two  clerks , one  to distribute  the charges  amongst  the other  clearing  bankers, agree  the totals ; the other  to receive  each of  and to agree the totals. These  charges against  the First bank constitute the First bank’s In-Clearing. Having agreed the totals  of the separate In-Clearings, the  First Bank’s  clerk enters  them  on the right –hand  side  of his  summary, each  agreed  total  against  the name  of the bank  concerned. The difference between the left-hand and the right-hand  total of the summary   is the amount  which  the  First Bank  is to receive  or to pay  as the result  of that  particular afternoon’s  country’s  clearing.  All  the other  clearing  bankers  will have  their own  summaries,showing what is due  to  or by  each of them  on the clearing  and the only  thing  remaining  is for  each  bank  to pay  or be paid  the balance  by means  of slips .It will be observed  from the transfer  slips  that those  banks  which the debtors on the day’s  clearing  transfer  the amount  from their account  of the clearing bankers  also  kept  with the  Bank of England and that those banks  which are creditors  on  the day’s  clearing  are paid by transfer  from a clearing  banker’s  account , countersigned by an  inspector  of the  clearing house. Thus  the net  result  is that  the entire  settlement  is effected  by debit  and credit  entries  in the accounts  of the clearing  Bankers, kept  with  the bank of  England,without disturbing  in the slightest  degree  the total  of Bankers Deposits in the  Bank’s books. For the purpose  of the clearing house  principle in a simple chart , there is an example  below  using skeleton  figures  and confining  the illustration  to three  clearing  members and the bank of England. It will be noted that at the  opening  of the clearing  each clearing banker  is in credit  with  credit  being 30,000 pounds. On conclusion of the clearing , the  aggregate credit  at the bank  of bank  of England is still 30,000 but balances  of the three  banks  have changed. It will be clearly seen how  by the clearing  system  the actual  passing  of notes  and coin  between debtor and creditor is avoided.

   Out-                  in                      Out                  in                                               Out                         In

Clearing           Clearing.             Clearing.                       Clearing                     Clearing                 Clearing

      £                     £                        £                    £                                                £                           £

-          Midwest  -                                6,300  Midwest      3,500                             2,100  Midwest   5,200

  5,200     Lloyds    6,300                -     Lloyds         -                               5,000   Lloyds       3,900

                    Barclays              3,000 Barclays      5,000                                 -     Barclays     ­-

______                                    ____     Barclays     1,700                           2,000     Barclays  _______

£8,700                                     £8,700                     £10,200                       £9,100                       £9,100                                                              

The figures in left-hand column on each slip, except the balance, represent amounts due to the bank named at the bead of the slip, and the right-hand column figures represent amounts due from it.

                                                Dr.           Summary                                Cr

                                                      £                        £

                                                       -  Midwest       300

                                                       - Lloyds            1,700

                                              2,000   Barclays        

                                               £2,000                      £2,000

The result of the clearing Barclays will transfer  £2,000 to the Clearing House Account, and Lloyds and the Midwest will transfer from the clearing house  £1,700 and  £300 respectively

                               

  

There were at one time  four clearings  each day , viz  

(a) the Town  Clearing , comprising the area  in the neighbourhood of the clearing house  which  is situated in post office  court, Lombard street , London. Within this area  are found  the  head offices of chief banks  and many  of the large  insurance  companies , the stock exchange  and the offices  of the  bill  and exchange brokers. This clearing was divided  into two parts namely the Morning  and the Afternoon  Clearings. Cheques  that passed  through  the town  clearing  bore  the letter T printed  in the  bottom left hand corner.  

(B)the country  clearing  letter C ,

(C)The metropolitan  clearing , comprising  the London  area , excluding  the area of the town  clearing, roughly  correspondent  with the London  postal  District. Cheques  that passed through  this clearing  bore the letter M. The country  and metropolitan clearings  were in the actual  settlement combined  with the town  clearing. The second world war, however , wrought  changes , the  Metropolitan  and country clearings  disappeared and now  together  with a large  part  of the town  clearing  they form  a  single , “General Clearing”. The remaining  part of the town clearing which consist  primarily  of the head offices  and certain branches  is still operated separately. In the illustration above , the cheque  was drawn  on a bank  in Southampton , paid into a   bank in Manchester and collected  through the London  country clearing , but there are  also  a number  of provincial  clearing  houses  established  in large towns, viz  in Bradford , Bristol, Newcastle, Hull, Leeds, Manchester for the  purpose of clearing  local cheques . Cheques  drawn  on banks  within  the central area  of each  town  mentioned  pass  through  the  local clearing  house , but cheques drawn  on banks  outside  this area  are passed  through  the London  clearing house. These clearing house  are managed  by the Bank of England. Very often  in individual  small towns  and villages  local  cheques  those drawn  on  and due for  collection  by local  branch  offices  go neither  to provincial nor  London  clearings  but are exchanged  between  the branches. Any balance is  settled by the debtor  branch  giving  the creditor branch a draft on it’s head office. There are at the present time eleven banks  which  are  members  of the London  Clearing  house. They are Barclays(first bank), Martin’s  National , Williams Deacon’s  District  and Glyn Mills, National provincial , Westminster, Coutts, Martins and Midland.  These are all joint stock banks with the exception of  Glyn mills  and co.  which is a private bank. The district  bank was not admitted  until 1936 when it acquired  the country bank. Reference  has already  been made  else where  to the volume  of cheque  clearings  but for the sake of completeness  figures  are also quoted here. During  1951 an average  of £361.8 million of cheques  were cleared  through the London  and provincial  Clearing  Houses  per day. A relatively small  provincial  Houses .In the year 1952, the figure was still higher £according to a standard financial school of thought. If  the considerable  volume  of cheques  that never passes  through  a  large number of transactions  completed  by the means  is  apparent.