Commercial banks are a financial institution that will accept deposits made by the general public and offers loans to fund investing and consumption to earn profits.
Commercial banks are usually described as banks that issue commercial loans as well as issue transactions deposits. They also have a variety of different kinds of liabilities and assets, and might engage in off-balance-sheet activities like the provision of financial guarantee (like the loan obligation) as well as derivatives.
It could also mean the term “bank” to refer to a bank or an area of a larger bank, that is a large or middle-sized company to distinguish from the retailer bank as well as one that is an investment bank. Commercial banks comprise private sector banks as well as banks that are public-sector banks.
The funds of a commercial bank belong to the public, and they can take them out at very short notice. Due to this, commercial banks offer credit for short periods, backed by of securities that can be easily sold and are easily marketed.
Commercial banks offer basic banking products and services for the general public including individual consumers as well as small – to mid-sized companies. They offer savings and checking accounts along with loan and mortgages as well as basic investment services such as CDs and other products like safe deposit boxes.
Before it approves an loan to a business commercial bank, it evaluates the ability of the business to repay the loan, based on aspects like the kind of business it’s in and its efficiency and size.
Commercial banks are classified into three kinds three types: public sector banks private sector banks, private sector banks and foreign banks.
- Banks in the public sector are banks which have been nationalized by the country’s government. The principal beneficiary in these banks is government. Most of the time the banks are run by the central bank of the country.
- Private banks are banks whose main capital is held by private and individual business. They are, therefore, limited liability corporations.
- foreign banks are banks with a head office in a foreign nation and branches across the world. Foreign banks play an important contribution to the economic health of the country, in addition to providing financial services to the people.
Banks also earn the interest they earn when they lend money to their customers. The money they lend are derived from customer deposits. However they will find that their rates of interest that the bank pays on the funds they lend is lower than that for the money they lend. For example, a bank could offer its customers who have a savings account an annual rate of 0.25 percent and charge mortgage customers 4.75 percent annually in interest.
Commercial Bank vs Investment bank
The investment and commercial banks offer a variety of functions and play an important role as a part of their respective roles in the economic system. Through the entire 20th century, the banks were two distinct branches within the sector were typically kept separate from each other throughout the U.S., thanks to the Glass-Steagall Act of 1933 that was passed at the time of the Great Depression. 2 The act was mostly repealed by the Gramm-Leach-Bliley Act in 1999 which allowed for the establishment Financial Holding Companies which could include both investment and commercial banks as subsidiaries.