Commercial banks are financial institutions that provide services for both savers and borrowers. Their role in the financial system is critical to keeping money available and liquid. By definition, commercial banks operate in pursuit of a profit, according to the Federal Reserve System's National Information Center.
Commercial banks allow individuals and organizations to deposit their money into a safe place, helping them build their savings. Deposits are made into different types of accounts, such as checking, savings and money market deposit accounts and time certificates. In return for the deposits, banks often pay interest to the depositors. The interest is a regular payment to the depositors for allowing the bank to hold the money. Interest rates vary depending on the type of account. Some accounts, such as many checking accounts, may not offer any interest.
Access for Depositors
Deposits are payable on demand, so that the depositors have access to the money if they want it to make purchases and pay their bills. The money in checking accounts and savings accounts typically is available to depositors with no strings attached, though they may have minimum balance requirements. However, instant access to other accounts may come with a price, such as withdrawal penalties. For instance, a money market account allows a maximum of five checks drawn on it each month. Any more than that and the depositor will pay a penalty.
Commercial banks use a portion of the funds they receive via deposits to make loans to individuals, organizations and government institutions. These loans can vary widely in size and purpose. For instance, one common type of commercial bank loan is through a consumer's credit card. The consumer purchases a product or service with the credit card, borrowing money from the bank that issued the card. Another common loan type for individuals is a real estate mortgage that allows someone to buy a home. Commercial banks also make much larger loans to businesses, helping them to finance large expenditures.
Other Financial Activities
Beyond the basics of taking deposits and making loans, commercial banks typically engage in a myriad of other financial activities. They often have wealth management services that help customers with topics such as financial planning, tax planning and estate planning. Many commercial banks include investment arms that work with individuals and others to invest their money, such as through buying stocks, bonds and mutual funds.
- Federal Reserve System National Information Center: All Institution Types Defined
- National Bureau of Economic Research: Do We Still Need Commercial Banks?
- Federal Reserve Bank of San Francisco: What is the Economic Function of a Bank?
- Federal Deposit Insurance Corporation. "Understanding Deposit Insurance." Accessed Aug. 19, 2020.
- Federal Reserve History. "Financial Services Modernization Act of 1999, Commonly Called Gramm-Leach-Bliley." Accessed Aug. 19, 2020.
- Federal Reserve System. "Large Commercial Banks." Accessed Aug. 19, 2020.
- Bank of America. "Who We Are." Accessed Aug. 19, 2020.
Tom Gresham is a freelance writer and public relations specialist who has been writing professionally since 1999. His articles have appeared in "The Washington Post," "Virginia Magazine," "Vermont Magazine," "Adirondack Life" and the "Southern Arts Journal," among other publications. He graduated from the University of Virginia.