Commercial banks serve the public directly by delivering banking products and services to consumers and business entities alike. These banks offer a wide array of deposit accounts, lending products and specialized services. The function of a central bank is to steer monetary policy, provide banking services to the government, control inflation, provide liquidity to the banking system and implement bank regulations.
Commercial banks offer consumers and business entities deposit products that range in scope from regular checking accounts to savings and certificate of deposit accounts. Central banks provide their respective governments with deposit accounts that are used for specific purposes such as government provided medical insurance, social welfare, old age pensions, disability and unemployment benefits as well as any other government program that requires the receipt and disbursement of funds.
One of the primary functions of a commercial bank is to service the lending needs of consumers and business enterprises that are located within the service area of the bank. Commercial banks offer a large assortment of lending products that include business lines of credit, trade financing, construction loans, mortgage loans, auto loans, home equity lines of credit and credit cards. The central bank's lending functions are limited to serving the immediate short-term needs of the country's individual banks on a daily basis through loans issued through discount window operations that are priced slightly below the overnight federal funds rate, which is the rate that banks borrow and loan money to each other.
Commercial banks offer the general public a wide assortment of fee-based services ranging in scope from safe deposit boxes and currency shipments to letters of credit and foreign exchange. The central bank also provides fee services for the country's banks and government entities. For example, central banks for a fee handle the clearing and collection of checks for its member banks, the sale and purchase of government bonds, the collection and payment of government social security and medical programs and various government sponsored mortgage loan programs.
Central banks within their respective countries are responsible for monetary policy that affects commercial banks and all socioeconomic levels. They adjust interest rates in order to accommodate prevailing economic conditions. For example, when prices are rising too fast and economic growth is very high, the central bank takes money out of the banking system through open market transactions such as increasing reserve requirements, raising key interest rates and selling bonds and notes in exchange for bank payments. These actions tend to raise interest rates for all levels of society.
Central banks and other regulatory agencies such as the U.S. Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corp. (FDIC) formulate banking regulations in order to ensure the safety and soundness of commercial banks. They also perform periodic regulatory examinations of banks for purposes of monitoring compliance with regulations. For example in the U.S., they examine the Truth in Savings Act (TISA) for compliance with proper customer notification and calculation requirements.