Definition of clearing house

The term "clearing house" originated in the context of financial transactions in the mid-19th century. In those times, banks would exchange large volumes of checks drawn by their customers on other banks, known as interbank settlements. These checks could bounce if the customer did not have sufficient funds in the accounts, causing delays and inconvenience. To address this issue, a group of banks in New York City established a clearing house in 1853. The primary function of this clearing house, known as the Clearing House Association, was to act as an intermediary between the banks to settle these interbank payments. Banks would deposit their checks with the clearing house, and the clearing house would net the amounts owed between banks and settle the resulting balances. The name "clearing house" reflects the clearing concept, where transactions are reconciled and settled, similar to how a physical clearing house (such as a train station) clears a path for trains to pass safely. This process provided greater efficiency and reduced financial risk by ensuring that all checks were settled on a timely basis, and banks no longer had to wait for the checks to clear individually. Since then, the term "clearing house" has expanded to refer to various types of financial institutions, such as payment clearinghouses and settlement houses, that facilitate the clearing and settlement of financial transactions between financial institutions, corporations, and governments. The concept of clearing has also been extended to include other transactions such as securities settlements and funds transfers.