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Commercial bank

From Wikipedia, the free encyclopedia

A commercial bank is a type of bank that provides services such as accepting deposits, making business loans, and offering basic investment products that is operated as a business for profit.

It can also refer to a bank, or a division of a large bank, which deals with corporations or large/middle-sized business to differentiate it from a retail bank and an investment bank.

Origin of the term

The name bank derives from the Italian word banco "desk/bench", used during the Renaissance era by Florentine bankers, who used to carry out their transactions on a desk covered by a green tablecloth.[1] However, traces of banking activity can be found even in ancient times.

In the United States the term commercial bank was often used to distinguish it from an investment bank due to differences in bank regulation. After the Great Depression, through the Glass–Steagall Act, the U.S. Congress required that commercial banks only engage in banking activities, whereas investment banks were limited to capital market activities. This separation was mostly repealed in 1999 by the Gramm–Leach–Bliley Act.

Role

The general role of commercial banks is to provide financial services to general public and business, ensuring economic and social stability and sustainable growth of the economy.

In this respect, credit creation is the most significant function of commercial banks. While sanctioning a loan to a customer, they do not provide cash to the borrower. Instead, they open a deposit account from which the borrower can withdraw. In other words, while sanctioning a loan, they automatically create deposits.

Primary functions

  • Commercial banks accept various types of deposits from public especially from its clients, including saving account deposits, recurring account deposits, and fixed deposits. These deposits are returned whenever the customer demands it or after a certain time period.
  • Commercial banks provide loans and advances of various forms, including an overdraft facility, cash credit, bill discounting, money at call etc. They also give demand and term loans to all types of clients against proper security.

Regulations

In most countries commercial banks are heavily regulated and this is typically done by a countries central bank. They will impose a number of conditions on the banks that they regulate such as keeping bank reserves and to maintain minimum capital requirements.

Services by product

Commercial banks generally provide a number of services to its clients, these can be split into core banking services such as deposits and loans and other services which are related to payment systems and other financial services.

Core products and services

Other functions

Along with core products and services, commercial banks perform several secondary functions. The secondary functions of commercial banks can be divided into agency functions and utility functions.

Agency functions include:

  • To collect and clear cheques, dividends and interest warrant
  • To make payments of rent, insurance premium
  • To deal in foreign exchange transactions
  • To purchase and sell securities
  • To act as trustee, attorney, correspondent and executor
  • To accept tax proceeds and tax returns

Utility functions include:

See also

References

  1. ^ de Albuquerque, Martim (1855). Notes and Queries. London: George Bell. p. 431.

Further reading

This page was last edited on 14 March 2019, at 14:27
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