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Main Dictionary C

Commercial Bank

Commercial bank a business entity providing different financial services to individuals and businesses of different sizes. Provided services might differ from bank to bank, but typically include such operations as accepting deposits, providing checking and savings accounts, extending loans and lines of credit of different kinds, as well as issuing credit cards, processing payments and transactions, exchanging foreign currency and providing other more specific services.

Commercial banks might be viewed as a middle unit between retail banks, which mostly work with individual customers and micro businesses, and investment banks, which work with authority structures, other banks or financial organizations, and large corporations providing them with complex services of special types. Commercial and investment banking operate differently and are traditionally separated by the law.

Commercial bank main working principles

The main principle of organizing a bank has remained the same since the banking system similar to the modern one appeared in Renaissance Italy. A bank operates on the basis of money clients deposit on their accounts, and this money is put into use by providing loans for other clients, gaining profit from charging these services with fees and having interest from loans. A crucial fact is that an interest rate on a savings account a bank pays to a customer is always significantly lower than an interest rate a bank has from loans.

A modern commercial bank is based on the same ground, though its structure and possibilities are much more complicated nowadays. Clients of a commercial bank might be individual customers, including persons of high-net-worth, as well as businesses ranging from small home-based businesses to big companies. At the same time, this type of banks doesn’t usually provide services for authority structures, other banks or financial organizations and large corporations.

Commercial bank main services

The main financial activity of a commercial bank is typically providing deposit accounts and loans for business. 

Deposit accounts of two types are usually available:

  • checking accounts, that usually have a lower or none interest rate, but allows withdrawing any needed sums at any given time;
  • savings accounts, that traditionally have higher interest rate, but often it’s often forbidden to use the deposited sum for a period of time.

The safety of money they deposit is one more issue that must not be ignored by potential bank customers. It’s important to choose federally insured financial organizations because deposits in such banks are insured up by the law to $250,000 per client per bank.

Loans provided by a commercial bank also differ, the main types are the following:

  • Mortgages, a type of loan used to buy real estate using the real estate in question as collateral. This loan type often takes the biggest part of an overall volume of extended loans by the bank;
  • Car loans, a type of loan used for purchasing vehicles under the condition of the vehicle being collateral;
  • Short-term loans for business, which are often used by small businesses to keep going in critical periods of waiting for receivables.
  • Specific business credits for different purposes. 
  • Personal loans for individuals, which are also available in most commercial banks.

One more important option provided by commercial banks is credit card issuing, which is, in fact, a line of credit for individual customers and businesses with the possibility to cancel it at any time.

Role of commercial banks in the economy and business

As it was stated above, commercial banks work by using the money their clients deposit to provide other clients with loans. This process helps to generate liquidity and efficiency of the economy. Banks help to organize new employment opportunities, raise the production volume, and incentivize selling and purchasing activity in the market by extending credits to businesses. So, the importance of commercial banks functioning lays not only in the fact that they give demanded services, but also in the impact they have on the economy in general. Therefore, commercial banking is strictly controlled by central banks of every government. A central bank traditionally supervises if there is a certain amount of deposited money preserved in case of a mass withdrawal, puts some restrictions on interest rate rise and provide deposit insurance.

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