A clearing house is a financial institution that facilitates the exchange of payments and securities between buyers and sellers. The clearing house function of a central bank plays a crucial role in the financial system by providing a secure and efficient platform for the settlement of financial transactions.
One of the main functions of a clearing house is to reduce the risk of default in financial transactions. When two parties agree to exchange funds or securities, there is always a risk that one of the parties may default on the agreement. By using a clearing house, both parties can be assured that their obligations will be fulfilled, as the clearing house acts as a intermediary and holds the funds or securities until the transaction is completed.
In addition to reducing the risk of default, the clearing house function of a central bank also helps to improve the efficiency of financial markets. By providing a centralized platform for the settlement of transactions, the clearing house reduces the need for multiple intermediaries and reduces the time and effort required to complete a transaction. This helps to make financial markets more efficient and allows for a greater volume of trades to be completed in a shorter period of time.
Another important role of the clearing house function of a central bank is to promote financial stability. The clearing house acts as a buffer between buyers and sellers, which helps to reduce the impact of financial shocks on the broader economy. For example, if a financial institution were to default on a large number of transactions, the clearing house would absorb the losses and help to prevent the default from spreading to other financial institutions. This helps to maintain confidence in the financial system and promotes stability.
Overall, the clearing house function of a central bank is a vital component of the financial system. It helps to reduce the risk of default, improve the efficiency of financial markets, and promote financial stability. Without the clearing house, financial transactions would be much more risky and the financial system would be less stable.
(a) Explain the âClearing House Functionâ of the Central Bank.
A branch wise detail in triplicateinprepared So, for all cheques drawn on different branches of banks. Also, central bank carries out exchange, remittance and other banking operations on behalf of the government. Money Supply Control Central banks conduct open market operations to acquire bad assets by generating 3. The central bank is a source of great strength to the banking system, iii It acts as a bank of central clearance, settlements and transfers. Transportation : Transportation of all materials is not permissible by Air transport. WORKING OF CLEARING HOUSE: Generally, a branch of the bank receives cheques from its customers drawnon other branches of different banks.
Explain the function of central bank as clearing house?
The government spends new currency and puts it into circulation to meet its expenditure. Small Carrying Capacity : The air crafts have small carrying capacity and therefore these are not suitable for canying bulky and cheaper goods. When the opposite occurs, and the economy is growing, the central bank will use various methods to keep that growth steady and in-line with other economic factors such as wages and prices. Central banks of a country look after the nationalinterest and advantages rather than after the profit. It does not deal that is to say with the public deposits or loans andadvances to the public. Independent and separate realisation to each cheque would take a lot of time and, therefore, central bank provides clearing facilities, i. It may be noted that RBI issues all currency notes in India except one rupee note.
Clearing House
Suppose there are two banks, they draw cheques on each other. Banker, Agent and Adviser to the Government: The central bank functions as a banker, agent and financial adviser to the government, ADVERTISEMENTS: a As a banker to government , the central bank performs the same functions for the government as a commercial bank performs for its customers. SLR is raised to reduce the ability of the banks to give credit. The clearing house function of the central bank has the following advantages: i It makes the use of cash by banks while settling their claims and counter-claims. The cost of aeroplanes, construction and maintenance of aerodromes and control mechanism needs a capital expenditure. The activities of the central bank are different from the activities ofthe commercial banks.
Top 9 ethical functions of central bank & clearinghouse advantages
Initial Margin and Maintenance Margin To protect traders in the futures market, every transaction requires margin â a deposit of a percentage of the total value of the contract. It regulates the volume of credit and currency, pumping in more money when market is dry of cash, and pumping out money when there is excess of credit. As a result, demand for loans and other purposes falls. They can lend more money subsequently to the business community. This facility of turning their assets into cash at short notice is of great use to them and promotes in the banking and credit system economy, elasticity and liquidity.
