What are commercial banks?

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A commercial bank is a type of financial institution that provides finance-related services for businesses and organizations, as well as for individuals.

In the past, commercial banks differed from retail banks in that commercial banks catered mostly to businesses, institutions and governments, while retail banks catered primarily to individual consumers and small businesses. Today, those lines have blurred as commercial banks increasingly provide the same consumer products and services offered by traditional retail banks.

A brief history of commercial banking

Although banking has probably been around since shortly after the invention of money, the work bank is derived from the Italian word banque, which means desk or bench. Early Florentine bankers during the renaissance era conducted their transactions on a desk or bench, often in a public area.

Because of the Great Depression, the U.S. Congress passed the Glass-Steagall Act in 1933, which limited the activities of commercial banks on Wall Street and the securities markets. Until its full repeal in 1999, this created a wall between much of commercial banking and investment banking.

Today, many commercial banks are more directly involved in the investment arena, including providing investment services and products for its customers. Although commercial banks are free to focus on different types of banking activities, most commercial banks are typically categorized into two camps: private and public sector commercial banks.

Private sector banks are owned by its individual (private) investors. By comparison, public sector banks are partly or fully owned by the government. This government involvement typically results in banking objectives that go beyond mere profits, such as civic development, infrastructure investments and social issues.

Commercial banking services

Today’s commercial banks offer many of the same services as retail banks, except that they were originally geared for businesses and institutions. These financial services and products include the following:

As mentioned above, many commercial banks now also offer investment banking services and products for many of their business and individual customers. High-net-worth individual clients will often work with a commercial bank in order to set up estate plans, business succession plans, and other family-related financial matters. Some commercial banks even offer a CD (Certificate of Deposit) program for wealthy business owners who wish to save larger amounts than are typically accepted at retail banks.

The deposits that are held by a commercial bank usually have the same type of insurance coverage from the FDIC (Federal Deposit Insurance Corporation) as the other types of banks that operate in the public sector, when eligible and within FDIC parameters.

Profits are earned by a commercial bank through the taking of shorter-term, liquid deposits and subsequently transforming the funds from these deposits into larger and longer-term loans. Commercial banks may also operate in certain types of investment banking transactions; however this is not considered to be a primary function of such banks.

It is important to distinguish between the operations of a commercial bank and an investment bank, as the latter provides services that include loan underwriting, facilitating company mergers, brokerage activities for institutional customers, and acting as an intermediary between the investing public and the issuer of securities.

Disclaimer: NetCredit is a direct personal loan provider and does not provide financial advice, nor does it vouch for any vendor or service mentioned on our NetCredit personal finance blog or online consumer loan glossary. Always research and perform due diligence on any service provider or vendor before deciding to use them, and we recommend that you speak with a financial advisor regarding all decisions that will affect your finances.

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