Commercial Bank
What is the definition of a commercial bank?
A commercial bank is a financial organisation that accepts deposits, provides checking account services, makes different loans, and provides people and small companies with basic financial products such as certificates of deposit (CDs) and savings accounts. The majority of individuals do their banking with a commercial bank.
Commercial banks profit through loans such as mortgages, vehicle loans, company loans, and personal loans, which they provide and earn interest on. Banks get their money from customer deposits, which allows them to offer these loans.
TAKEAWAYS IMPORTANT
Consumers and small to medium-sized enterprises can use commercial banks for basic banking services such as deposit accounts and loans.
Commercial banks profit from a range of fees as well as interest earned on loans.
Commercial banks have typically had physical facilities, but an increasing number now operate solely online.
Commercial banks are vital to the economy because they provide the market with capital, credit, and liquidity.
Commercial Banks and Their Operations
Individual consumers and small to medium-sized enterprises can use commercial banks for basic banking services and products. Checking and savings accounts, loans and mortgages, basic investment services such as CDs, and additional services like safe deposit boxes are among the services available.
Service fees and charges are how banks generate money. Account costs (monthly maintenance charges, minimum balance fees, overdraft fees, non-sufficient funds (NSF) penalties), safe deposit box fees, and late fees vary depending on the goods. In addition to interest rates, many loan packages have fees.
Banks also profit from interest earned by lending money to other customers. Customers' deposits are used to fund the loans. The bank, on the other hand, pays a lower interest rate on money it borrows than it does on money it lends. For example, a bank may charge savings account users 0.25 percent yearly interest while charging mortgage customers 4.75 percent annual interest.
Commercial banks have typically been housed in buildings where consumers may utilize teller windows and automated teller machines (ATMs) to conduct ordinary banking transactions. With the advancement of internet technology, most banks now enable their customers to do most of the same activities that they could perform in person, such as transfers, deposits, and withdrawals, online.
IMPORTANT :A rising number of commercial banks operate entirely online, requiring all transactions with the bank to be completed via electronic means. Because these banks don't have physical facilities, they may offer a greater range of products and services to their consumers at a cheaper cost—or none at all.
Commercial Banks' Importance
Commercial banks play a vital role in the economy. They not only provide a necessary service to customers, but they also assist in the creation of capital and liquidity in the market.
They maintain liquidity by borrowing money from their clients' accounts and lending them out to others. Commercial banks help to create credit, which leads to increased production, employment, and consumer spending, all of which help to grow the economy.
As a result, commercial banks are extensively regulated by their country's or region's central bank. Central banks, for example, impose reserve requirements on commercial banks. This implies that banks must maintain a specific percentage of their consumer deposits at the central bank as a safety net in case the general public withdraws cash in a hurry.
Particular Points to Consider
Commercial bank investments, such as savings accounts and CDs, are appealing to customers because they are insured by the Federal Deposit Insurance Corporation (FDIC) and money may be withdrawn quickly. Customers may withdraw money whenever they want, and their accounts are completely protected up to $250,000. As a result, banks do not have to pay a high price for this money. 1
Many banks pay no interest (or very little) on checking account balances and provide savings account interest rates that are substantially below U.S. Treasury bond (T-bond) rates.
Consumer lending accounts for the majority of bank lending in North America, with residential mortgages accounting for the vast majority of this. Mortgages are used to purchase residences, and the homes are frequently used as collateral for the loan. Mortgages are generally arranged for a 30-year payback period, with fixed, adjustable, or variable interest rates. Although several riskier mortgage products, such as pick-a-payment mortgages and negative amortisation loans, were available during the United States' housing bubble in the 2000s, they are now considerably less frequent.
For many banks, automobile financing is another important area of secured lending. Auto loans often have shorter durations and higher interest rates than home loans. Other financial organisations, such as captive car finance operations managed by automotive manufacturers and dealers, compete fiercely with banks in the auto lending market.
Credit Cards from the Banks
Another important source of funding is credit cards. Credit cards are basically revolving lines of credit that can be used at any moment. Commercial banks sell them on behalf of private card issuers.
After a transaction, money is transmitted between the shopper's bank and the merchant's bank using proprietary networks controlled by Visa and MasterCard. Credit card lending is not undertaken by all institutions since default rates are generally substantially higher than in mortgage lending or other forms of secured lending.
Credit card lending, on the other hand, generates lucrative fees for banks—interchange fees charged to merchants for accepting the card and entering into the transaction, late-payment fees, currency exchange, over-the-limit, and other fees for the cardholder, as well as higher rates on credit card balances carried from month to month.
Investment Banks vs. Commercial Banks
Both commercial and investment banks play vital roles in the economy and provide important services. Because of the Glass-Steagall Act of 1933, which was established during the Great Depression, these two divisions of the banking industry were kept separate for most of the twentieth century in the United States. 2 The Gramm-Leach-Bliley Act of 1999 essentially eliminated it, permitting the formation of financial holding corporations with both commercial and investment bank subsidiaries. 3
FAST FACT While the Gramm-Leach-Bliley Act tore down the commercial and investment bank wall, it also put in place some safeguards, such as prohibiting a bank and a nonbank subsidiary of the same holding company from marketing each other's products or services—to prevent banks from promoting securities underwritten by other subsidiaries to their customers—and limiting the size of subsidiaries.
Investment banking provides banking services to major enterprises and institutional investors, whereas commercial banking has traditionally given services to people and businesses. They work as financial middlemen for their clients, offering them a variety of services.
Institutional and high-net-worth people can use underwriting services, merger and acquisition (M&A) strategies, corporate restructuring services, and other sorts of brokerage services (HNWIs).
Individual consumers and small businesses are among the commercial banking clients, whereas governments, hedge funds, other financial institutions, pension funds, and huge corporations are among the investment banking clientele.
Commercial Banks Examples
Commercial banks or commercial banking operations are home to some of the world's largest financial institutions, many of which are based in the United States. Chase Bank, for example, is JPMorgan Chase's commercial banking division.
Chase Bank, headquartered in New York City, has assets of $3.2 trillion as of June 2021. 4
With more than $2.35 trillion in assets and 66 million customers, including both retail and small and mid-sized enterprises, Bank of America is the second-largest bank in the United States.
Is My Financial Institution a Commercial Bank?
Possibly! When most people hear the word "bank," they think of commercial banks. Commercial banks are for-profit financial organisations that accept deposits, provide loans, secure assets, and engage with a wide range of customers, including individuals and corporations. However, if you have an account with a community bank or credit union, it is unlikely to be a commercial bank.
What Is the Economic Role of Commercial Banks?
The fractional reserve banking system, which is used in most industrialised nations, relies heavily on commercial banks. This permits banks to offer fresh loans of up to (usually) 90% of their available deposits, allowing the economy to thrive by releasing money for lending.
Is it Safe to Keep My Money in a Commercial Bank?
Yes, for the most part. Commercial banks are extensively regulated, and FDIC insurance covers most deposit accounts up to $250,000. 6 Furthermore, the legislation prohibits the mixing of commercial and investment banking money. 6
