Commercial Bank

Commercial Bank What is a Commercial Bank?

A commercial bank is a financial institution and intermediary that provides numerous services to its clients including: transaction, money market and savings accounts. Following the passing of the Glass-Steagall Act, the United States Federal Government required commercial banks to only engage in banking activities, while investment banks were only limited to transactions involving capital market activities.

As a result of this legislation, commercial banks and investment banks are placed under separate ownership according to the law of the United States; thus the term “commercial bank” refers to a financial institution that deals solely with deposits and loans from big businesses or corporations.

In some jurisdictions throughout the United States, commercial banks may also act separately from retail banks, which are financial institutions who offer financial services to consumers or individual customers. That being said, the majority of banks in the United States offer both commercial and retail banking services to their client base. 

The Fundamental Roles of Commercial Banks:

A commercial bank is a fundamental intermediary that will provide their customers with the following banking activities:

Commercial banks process payments through telegraphic transfers, internet banking services, or EFTPOS.

Commercial banks issue bank drafts and banking checks

Commercial banks provide lending through the installments and creations of loans or through overdrafts. 

Commercial drafts accept money deposited by their customers—typically either individual consumers or big businesses.

Commercial banks will provide their customers with documentary, a standby letter of credit, performance bonds, guarantees, underwriting commitments, as well as other forms of off balance sheet exposures. 

Commercial banks offer customers the ability to store their funds or documents in safety deposit boxes.

Larger commercial banks will underwrite bonds, and develop markets in currency, interest rates, and credit-based securities. That being said, more modern large commercial banks will typically have an investment bank arm that will coordinate activities aligned with investment banks. 

A commercial bank will sell, distribute, or mediate insurance, unit trusts, and other similar financial products with or without the advice of insurance companies. 

Types of Loans Offered by Commercial Banks:

Commercial banks will offer secured loans, where the borrower will pledge one of his or her assets (for example their home or car) as a form of collateral for the loan. 

Commercial banks will also offer mortgage loans, which are a traditional type of debt instrument, used to purchase real estate. Under the creation of a mortgage loan, the funds offered are used by the individual to finance the purchase of a home or property.

In turn, the commercial bank is given a line of security, meaning a lien on the title to the house, until the mortgage obligation is paid off in full. If the borrower defaults on the mortgage, the bank has the legal right to repossesses the home and sell it on the open market to recover the funds owed in the mortgage obligation.

Lastly, a commercial bank may also offer an unsecured loan, which is a type of monetary loan that is not secured against the borrower’s assets. These types of loans are marketed under different guises including: personal loans, credit card debts, bank overdrafts, corporate bonds, or other lines of personal credit.

Related Topics