The borrower must be able to demonstrate that they will be able to service and repay the loan and show when it will be repaid. The bank will require a complete set of accounts including an audited balance sheet, profit and loss statement and, most important of all, a cashflow statement and an analysis of future cashflow projections. These should be supported by a business plan that justifies the key assumptions in the financial projections.
Many interbank clearing systems take the form of end-of-day clearing (as opposed to continuous). Payments due between each of the clearing house members are calculated on a gross basis but payments are done on a net basis. Netting reduces overall risks arising from the failure of one member. Examples of clearing systems in the US are Fedwire, for payments between US Federal Reserve bank members, and CHIPS, for payments between New York-based banks.
Check clearing poses some practical problems. In more developed countries check details are captured at the branch of the bank where they are deposited, using a combination of different methods. Some data is encoded in magnetic form of the checks and can be scanned. Some data can be captured using optical character recognition (OCR) systems and the rest has to be input manually. Checks are then only retained as part of the process of maintaining a paper audit trail. In less developed countries checks have to be delivered in physical form to a regional or national data entry center where the data is captured.
Some countries also have specialist payment systems used for salary payments, payments to suppliers, standing orders and so on. Members of these systems include non-financial organizations. These systems are a part of what is now more generally referred to as e-commerce and cover settlement of B2B (business-to-business) and B2C (business-to-consumer) transactions. Despite the introduction of the euro no single European clearing and payments systems exists and banks must rely on other means such as sending instructions via SWIFT or their own networks and using national payments systems.
In “continuous” systems net settlement is done on a much more frequent, intra-day basis. These systems are often associated with secondary capital market transactions (bond clearing, for example). Continuous net settlement is generally accepted as further reducing risk.
In a modern economy transactions between parties usually involve the exchange of items such as capital goods, labor, manufactured goods, services and legal claims for a “cash” consideration. The exchange may involve more than one currency and may involve a time difference between delivery of goods and actual payment. Such exchange transactions carry with them a number of risks including settlement failure and fraud. Financial organizations cooperate with one another to establish the infrastructure and procedures necessary to minimize these risks and transaction costs. These include formal markets such as stock exchanges, and automated systems to enable payments to be made both within individual countries and also cross-border.
The provision of clearing and payment systems is one of the most important operational services that banks provide. Payment systems may be either national or cross-border.
The most important international system is provided by the Society for Worldwide Interbank Financial Telecommunications (SWIFT). This is a cooperative owned by 7000 members operating in approximately 200 countries. SWIFT was established in 1973 and is based in Brussels, Belgium, but has operational centers around the world.
SWIFT provides two key services. First it provides a global telecommunications network to enable banks and other financial institutions to exchange electronic messages to instruct transfers of funds in a secure manner. Second it coordinates the standardization of the format of these messages. The latter is vital to allow banks to send, receive and interpret electronic payment instructions in an automated way.
SWIFT has three principal challenges. It must ensure it provides a secure service, maintains an extremely high level of reliability and has a well-managed implementation of changes in message formats or communications protocols. Most countries have their own clearing systems for payments made between banks, and on behalf of customers with accounts at these banks. The vast majority of these systems concern electronic transfers of funds but other means have to be used for payments involving paper checks.
