Acommercial bank is afinancial institution that acceptsdeposits from the public and givesloans to its clients for the purposes of consumption andinvestment to make aprofit.
It can also refer to abank or a division of a larger bank that deals withwholesale banking to corporations or large or middle-sized businesses, to differentiate fromretail banks andinvestment banks. Commercial banks includeprivate sector banks andpublic sector banks. However, central banks function differently from commercial banks, despite a common misconception known as the "bank analogy". Unlike commercial banks,central banks are not primarily focused on generating profits and cannot become insolvent in the same way as commercial banks in a fiat currency system.[1]
The namebank derives from theItalian wordbanco 'desk/bench', used during theItalian Renaissance era byFlorentine bankers, who used to carry out their transactions on a desk covered by a green tablecloth.[2] 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 aninvestment bank due to differences in bank regulation. After theGreat Depression, through theGlass–Steagall Act, the U.S. Congress required that commercial banks only engage in banking activities, whereas investment banks were limited tocapital market activities. This separation was mostly repealed in 1999 by theGramm–Leach–Bliley Act.
The general role of commercial banks is to provide financial services to the general public and business, ensuring economic and social stability andsustainable 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
Regulations
In most countries, commercial banks are heavily regulated and this is typically done by a country'scentral bank. They will impose a number of conditions on the banks that they regulate such as keepingbank reserves and to maintain minimumcapital requirements. They also require some capital
Commercial banks generally provide a number of services to its clients; these can be split intocore banking services such as deposits, loans, and other services which are related topayment systems and other financial services.
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:
Utility functions include:
Data from Wikidata
