5 C’s of Credit (5 C’s of Banking)
Categories of Banks
How to manage your banking relationship.
Certificate of Deposit (CD)
Personal Credit for Commercial Loan
Alternative Forms of Financing
What Your Banker Wants You to Know
Commercial Bank Definition
Commercial banks are the most unrestricted and common of the different bank forms. A commercial bank is often considered a financial intermediary for transactions involving anything from a savings account to a certificate of deposit (CD).
Commercial Bank Meaning
A commercial bank often deals with daily transactions between checking and savings accounts. But they also deal with term deposits and money market accounts. These banks in the past was not allowed to take part in the capital markets under the Glass-Steagall Act. This activity was typically performed by investment banks. However, since the repeal of the act there has been less and less division between the two groups.
Commercial banks create money when they accept money from businesses or individuals owning a savings account, checking account, or a CD. It then loans these funds to businesses or individuals. It makes its profit by accepting interest payments.
This means that unlike most institutions, a bank’s assets are loans and bonds that it issues, while its liabilities are the savings and checking accounts along with other deposits. This is because these liabilities are payable on demand from the account holder unless it is a term deposit in which it is payable at the end of the term.
This is also why the Federal Reserve requires commercial bank reserves to ensure that a bank always has the proper amount of funds to meet its liabilities. This commercial bank regulation came after scares during the depression in which commercial banks were unable to meet their liabilities. This is why every bank is also required to carry Federal Deposit Insurance through the Federal Deposit Insurance Corporation (FDIC).
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