Bilateral Credit Limit

AAA

DEFINITION of 'Bilateral Credit Limit'

Intraday credit limits set by two institutions for use with one another, usually within a large clearing system that operates by netting amounts due to and due from institutions by other members on a daily basis. Within the banking community, the most well-known clearing system that uses netting as the mechanism for settlement is the Clearing House Interbank Payments System (CHIPS) in the United States.

INVESTOPEDIA EXPLAINS 'Bilateral Credit Limit'

The purpose of bilateral credit limits is to reduce the credit risk exposure of each member institution to another, and to ensure the stability of the payment system overall in case one institution fails to deliver on its obligations.

In addition to bilateral credit limits, the payment systems usually have aggregate credit limits, which limit one institution's intraday obligation to all members of the system collectively. Another large payment system, Fedwire, also uses credit limits, although its settlement is known as real-time gross settlement, rather than netting.

RELATED TERMS
  1. Netting

    Consolidating the value of two or more transactions, payments, ...
  2. Multilateral Netting

    An arrangement among multiple parties that transactions be summed, ...
  3. Clearing House

    An agency or separate corporation of a futures exchange responsible ...
  4. Settlement Risk

    The risk that one party will fail to deliver the terms of a contract ...
  5. Central Counterparty Clearing House ...

    An organization that exists in various European countries that ...
  6. Real Time Gross Settlement - RTGS

    The continuous settlement of payments on an individual order ...
RELATED FAQS
  1. What does CHIPS UID mean?

    CHIPS UID stands for Clearing House Interbank Payments System Universal Identifier. This is just a fancy name for an electronic ... Read Full Answer >>
  2. How can I use a regression to see the correlation between prices and interest rates?

    In statistics, regression analysis is a widely used technique to uncover relationships among variables and determine whether ... Read Full Answer >>
  3. What is the difference between a correspondent bank and intermediary bank?

    Correspondent and intermediary banks serve as third-party banks that coordinate with beneficiary banks to facilitate international ... Read Full Answer >>
  4. How do I calculate a modified duration using Matlab?

    The modified duration gauges the sensitivity of the fixed income securities to changes in interest rates. To calculate the ... Read Full Answer >>
  5. How do I calculate the rule of 72 using Matlab?

    In finance, the rule of 72 is a useful shortcut to assess how long it takes an investment to double given its annual growth ... Read Full Answer >>
  6. How do I calculate the standard error using Matlab?

    In statistics, the standard error is the standard deviation of the sampling statistical measure, usually the sample mean. ... Read Full Answer >>
Related Articles
  1. Personal Finance

    Using Economic Capital To Determine Risk

    Discover how banks and financial institutions use economic capital to enhance risk management.
  2. Economics

    Inside National Payment Systems

    Investopedia explains: The global interconnection of U.S. payment systems makes commerical and financial transfers possible.
  3. Personal Finance

    How Basel 1 Affected Banks

    This 1988 agreement sought to decrease the potential for bankruptcy among major international banks.
  4. Economics

    What is a Resident Alien?

    A resident alien is a foreigner who is a permanent resident of the country in which he or she resides but does not have citizenship.
  5. Fundamental Analysis

    Understanding the Profitability Index

    The profitability index (PI) is a modification of the net present value method of assessing an investment’s attractiveness.
  6. Economics

    What is Neoliberalism?

    Neoliberalism is a little-used term to describe an economy where the government has few, if any, controls on economic factors.
  7. Fundamental Analysis

    Explaining the Monte Carlo Simulation

    Monte Carlo simulation is an analysis done by running a number of different variables through a model in order to determine the different outcomes.
  8. Entrepreneurship

    Employment Negotiations: What To Ask For & How

    Improving their first offer: What you should know
  9. Economics

    Understanding Limited Liability

    Limited liability is a legal concept that protects equity owners from personal losses due to their ownership interest in the company.
  10. Investing Basics

    What Does a Financial Intermediary Do?

    A financial intermediary is an institution that acts as a go-between in a financial transaction.

You May Also Like

Hot Definitions
  1. Inbound Cash Flow

    Any currency that a company or individual receives through conducting a transaction with another party. Inbound cash flow ...
  2. Social Security

    A United States federal program of social insurance and benefits developed in 1935. The Social Security program's benefits ...
  3. American Dream

    The belief that anyone, regardless of where they were born or what class they were born into, can attain their own version ...
  4. Multicurrency Note Facility

    A credit facility that finances short- to medium-term Euro notes. Multicurrency note facilities are denominated in many currencies. ...
  5. National Currency

    The currency or legal tender issued by a nation's central bank or monetary authority. The national currency of a nation is ...
  6. Treasury Yield

    The return on investment, expressed as a percentage, on the debt obligations of the U.S. government. Treasuries are considered ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!