What is Clearing Bank? Definition of Clearing Bank, Clearing Bank Meaning and Concept

Bank clearing is the type of agreement between two banking entities through which the payment of checks and other payment documents that can be paid under the supervision of the same or other entities is produced.

This compensation action is considered as compensation between the participating entities and is formally regulated by a central bank or other economic and financial organizations in charge of such work. The latter are generally called a clearing house.

Basically, bank clearing supposes that each bank has a service or department that is in charge of gathering the payment instruments or debt securities delivered by clients and can be directed to other entities in which to manage the specific collection.

The origin of this type of banking mechanism was the need to simplify payment operations between natural and legal persons and the cancellation of their debts with new alternatives.

The exchange of means of payment is carried out physically, since bills of exchange or checks are presented in this way at the bank in question to proceed with their legal verification and subsequent collection. However, with technological evolution and the modernization of bank payments, the trend is to move towards a more electronic or digital system.

In Spain, the Bank of Spain's Settlement Service (TARGET2-Bank of Spain) and the National Electronic Clearing System are the main ones in charge of carrying out the control and supervision of the clearing mechanism.

Bank clearing modalities

The bank clearing modalities that exist are the following:

  • Conventional: The agreement between the parties can be produced without resorting to the legislative route by mutual agreement.
  • Legal: Produced taking into account the working legislation of a period and under the mutual consent of both parties and the corresponding clearing house. An example of this type is the usual cashing or bank cashing of checks.
  • Judicial: It arises as a result of a judicial mandate or sentence, very commonly in cases of late payment or non-payment between the opposing parties.

Other possibilities of bank clearing

Banks often use the compensation system to solve their payment problems among themselves or possible debts incurred. This process involves the use of some type of means of payment or title used for this purpose.

On the other hand, in the stock market this method is also useful when controlling the payment of securities or titles between different parties.