DEFINITION of 'Net Settlement'

Net settlement refers to the resolution of all of a bank's transactions at the end of the day. Since banks engage in so many electronic transactions, they cannot simply count their cash at the close of business. Instead, they have to add up all of their electronic credits and debits. The bank then sends its settlement file to a Federal Reserve Bank, which credits it with any funds due for interbank settlements.

BREAKING DOWN 'Net Settlement'

A bank's net settlement is similar to an individual’s balancing his or her checkbook. If all of your transactions are in cash, all you need to do to is open your wallet and count the bills. However, since most people have money going out in the form of cash, checks, and debit and credit card transactions, and money coming in as cash, checks and direct deposits; all transactions, including purchases, returns, bills paid, and paychecks received, must be netted to determine the full picture.

Net settlement can make it easier for banks to manage liquidity. Types of net settlement systems include bilateral and multilateral settlements. Bilateral settlement systems entail final settlement of all payments made between two banks over the course of a day to be be settled at the close of business, typically via a transfer between their accounts at the central bank. A multilateral settlement consists of each bank having a net balance with the system as a whole, rather than with individual banks.

Net Settlement Versus Gross Settlement

Gross settlement opposes net settlement. In particular, a real-time gross settlement system is in contrast with net settlement systems, such as the U.K.’s BACS Payment Schemes Limited (previously the Bankers' Automated Clearing Services or BACS). With BACS, for example, transactions among institutions are accumulated during the day; at the close of business, a central bank will adjust the active institutional accounts by the net amounts of the funds exchanged.

Large-value interbank funds transfers usually use real time gross settlement. These often require immediate and complete clearing, which a country’s central bank usually organizes. Real-time gross settlement can lessens an institution’s settlement risk overall as interbank settlement usually occurs in real time throughout the day (instead of simply all together at the end of the day with net settlement). This specific form of gross settlement can eliminate the risk of a lag in completing the transaction. (Settlement risk is often called delivery risk.)

Real-time gross settlement can often incur a higher charge than net settlement processes, which bundle and net payments.

  1. Settlement Period

    A settlement period is the time between the settlement date and ...
  2. Settlement Risk

    Settlement risk is the risk that one party will fail to deliver ...
  3. Account Settlement

    An account settlement generally refers to the payment of an outstanding ...
  4. Loss Settlement Amount

    Loss settlement amount is a term used to denote the amount of ...
  5. Official Settlement Account

    An official settlement account is an account used to keep track ...
  6. Buyout Settlement Clause

    A buyout settlement clause is an insurance contract provision ...
Related Articles
  1. Personal Finance

    Debt Settlement Arrangements And Your Credit Score

    The debt settlement process is not for everyone and can further damage your credit score. However, it can prevent the debt from being sold to a collection agency, who may only accept payment ...
  2. Personal Finance

    What Is a Lawsuit Settlement Loan?

    A lawsuit settlement loan is a cash advance for an impending settlement or judgment. There can be pricey strings attached.
  3. Personal Finance

    Debt Settlement: Cheapest Way to Get Out of Debt?

    Debt settlement is not for everyone, but for those seriously in debt it may prove an effective means of solving the problem.
  4. Investing

    Credit Suisse to Pay $5.3 Billion to End MBS Suit

    For the second time in as many days, a major European bank has reached a financial settlement with the U.S. Justice Department. Credit Suisse (NYSE: CS) will pay a total of nearly $5.3 billion ...
  5. Investing

    HUD-1 Form: What Must Be On It

    You can't close on property involving federally related mortgages without a HUD-1 form. Use these instructions for a correct form so you close on time.
  6. Investing

    BP Stock Rises After $175M Oil Spill Settlement (BP)

    The $175 million settlement also eliminates uncertainty surrounding the company's future liabilities as it relates to the spill, reported Bloomberg.
  7. Investing

    Goldman Sachs Agrees to $5 Billion Settlement (GS)

    The Department of Justice announced Monday that Goldman Sachs Group Inc. (GS) will pay $5 billion to settle state and federal claims related to its handling of mortgage-backed securities in the ...
  8. Trading

    Credit Default Swaps: What Happens in a Credit Event?

    The credit crisis of 2008 prompted important changes to the settlement of credit default swaps.
  9. Tech

    SGX, Central Bank Plan Blockchain for Settlements

    Several entities in Singapore are collaborating to build a faster securities settlements system.
  10. Insights

    SEC Subpeonas 4 Banks in ADR Investigation: Report

    As if the big banks haven't gotten into enough regulatory hot water over the past few years, a clutch of major financial institutions are being investigated by the Securities and Exchange Commission ...
  1. How will debt settlement affect my credit score?

    Understand how debt settlement typically works and find out how sometimes the best option to eliminate an outstanding debt, ... Read Answer >>
  2. How do futures contracts roll over?

    Learn about why futures contracts are often rolled over into forward month contracts prior to expiration, and understand ... Read Answer >>
  3. What's the difference between debt consolidation and debt settlement?

    Learn the differences between negotiating a debt settlement with your existing creditors and applying for a new consolidation ... Read Answer >>
Trading Center