Commercial bank

A commercial bank is a specific type of financial institution. Its main goal is to make a profit. It does this by accepting deposits from the public. Then, it gives loans to its various clients. Commercial banks can also refer to a division of a large bank. This division might handle wholesale banking for large or middle-sized businesses. This is different from retail banks or investment banks. These institutions include both private sector and public sector banks.

One of the most important roles of a commercial bank is credit creation. This process is a key part of how they function. When a bank approves a loan, it does not simply hand over cash. Instead, the bank opens a new deposit account for the borrower. The borrower can then withdraw money from this new account. This method automatically creates new deposits in the system. By using deposits to make loans, banks turn them into derivative deposits. This process can increase funds by several times the original deposits. This helps drive economic development and social stability.

Commercial banks offer several types of primary services. These are often called core banking services. One core service is accepting money through different deposit accounts. These include savings accounts and fixed deposits. Customers can demand their money back after a certain period. Another core service is lending money through various methods. Banks provide overdraft facilities and cash credit. They also offer bill discounting and money calls. Some loans are demand or term loans that require proper security.

Beyond core services, banks perform agency and utility functions. Agency functions mean the bank acts on behalf of the client. For example, they collect and clear cheques or dividends. They can also pay rent or insurance premiums for customers. They may deal in foreign exchange or buy and sell securities. Some banks even act as trustees, attorneys, or executors. Utility functions are services that make life easier for the public. These include providing safe deposit boxes for valuables. Banks also offer money transfers and issue traveler's cheques. They can even process utility bills like gas or water.

Modern banking involves many digital and technical payment methods. Banks manage transactions through various electronic systems. This includes telegraphic transfers and EFTPOS. They also use internet banking to process payments. Banks provide cash management and treasury management services. They may also handle private equity financing. For businesses, they provide transaction accounts and issue bank drafts. These services ensure that money moves smoothly through the economy.

History shows that banking has deep roots. The word "bank" comes from the Italian word *banco*. This word means a desk or a bench. During the Italian Renaissance, Florentine bankers used these desks. They often covered their transaction desks with green tablecloths. In the United States, the term helped distinguish these banks from investment banks. After the Great Depression, the Glass-Steagall Act was passed. This law required commercial banks to focus only on banking activities. This kept them separate from capital market activities. However, the Gramm-Leach-Bliley Act of 1999 mostly repealed this separation.

Because they are so important, commercial banks are heavily regulated. In most countries, a central bank oversees them. Central banks impose many conditions to ensure stability. For example, they require banks to keep specific bank reserves. They also mandate minimum capital requirements. It is important to note that central banks are different from commercial banks. Central banks do not focus on making a profit. They also cannot become insolvent in a fiat currency system like commercial banks can.