Commercial bank
Financial institutions that accept deposits and create credit for commerce.
A commercial bank is a financial institution that accepts deposits from the public and provides loans to clients to facilitate commercial affairs, including monetary and non-monetary exchanges, while generating profit. It can also refer to a bank or division of a larger bank that deals with wholesale banking to corporations or large or middle-sized businesses, distinguishing it from retail banks and investment banks. Commercial banks include private sector banks and public sector banks, and they differ from central banks, which are not primarily focused on generating profits and cannot become insolvent in the same way in a fiat currency system.
- field
- Finance and Banking
- known_for
- Credit creation, accepting deposits, and providing loans to facilitate commerce
- origin_of_name
- Italian word 'banco' (desk/bench), used by Florentine bankers during the Renaissance
- key_regulation
- Glass–Steagall Act (U.S.) separated commercial and investment banking; largely repealed by Gramm–Leach–Bliley Act in 1999
- primary_function
- Credit creation through sanctioning loans and automatically creating deposits
Lore & Background
The name 'bank' derives from the Italian word 'banco', meaning desk or bench, used during the Italian Renaissance era by Florentine bankers who conducted transactions on a desk covered by a green tablecloth. 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 an investment bank due to differences in bank regulation after the Great Depression, when the Glass–Steagall Act required commercial banks to engage only in banking activities, while investment banks were limited to capital market activities. This separation was mostly repealed in 1999 by the Gramm–Leach–Bliley Act.
Reader's Guide
Commercial banks play a central role in economic stability and growth by providing financial services to the general public and businesses. Their most significant function is credit creation: when sanctioning a loan, they do not provide cash but instead open a deposit account, automatically creating deposits. This process, based on check circulation and transfer settlement, allows derivative deposits to increase by interval times the original deposits, greatly improving the banks' ability to drive economic development. Commercial banks accept various deposits (e.g., saving accounts, fixed deposits) and provide loans and advances such as overdrafts, cash credit, and bill discounting. They also perform secondary functions, including agency functions (collecting cheques, making payments, dealing in foreign exchange) and utility functions (providing safe deposit boxes, money transfers, and credit/debit cards). In most countries, commercial banks are heavily regulated by the central bank, which imposes conditions such as keeping bank reserves and maintaining minimum capital requirements.
Did You Know?
- The name 'bank' comes from the Italian word 'banco', meaning desk or bench, used by Florentine bankers during the Renaissance.
- After the Great Depression, the U.S. Glass–Steagall Act required commercial banks to engage only in banking activities, separating them from investment banks.
- When a commercial bank sanctions a loan, it does not provide cash but instead opens a deposit account, automatically creating deposits.
- Commercial banks are heavily regulated by a country's central bank, which imposes conditions such as keeping bank reserves and minimum capital requirements.
Frequently Asked Questions
What is a commercial bank?
A commercial bank is a profit-driven financial institution that takes in public deposits and extends loans to help individuals and businesses carry out commercial transactions. It may operate as a standalone entity or as a division inside a larger banking group, and it is distinct from both retail banks and investment banks.
What is the primary function of a commercial bank?
Its core function is credit creation: when the bank approves a loan, it simultaneously generates a matching new deposit in the borrower's account. This process expands the money supply and keeps commercial and monetary exchanges flowing.
Where does the term 'commercial bank' come from?
The name traces back to the Italian word 'banco,' meaning desk or bench, which Florentine moneylenders used as their work surface during the Renaissance. The term gradually broadened to cover institutions handling commercial financial dealings.
How does a commercial bank differ from a central bank?
A commercial bank pursues profit and serves the public, corporations, and mid-sized businesses, while a central bank focuses on monetary policy and financial stability without a profit motive. Central banks also cannot be liquidated in the way a commercial bank can.
What U.S. law once separated commercial banking from investment banking?
The Glass–Steagall Act erected a legal wall between the two activities to limit systemic risk. That separation was largely dismantled in 1999 when the Gramm–Leach–Bliley Act repealed most of its key provisions.
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