A commercial bank is a financial institution which accepts deposits from the public and gives

loan In finance, a loan is the lending of money by one or more individuals, organizations, or other entities to other individuals, organizations, etc. The recipient (i.e., the borrower) incurs a debt and is usually liable to pay interest on that d ...

s for the purposes of consumption and

investment Investment is the dedication of money to purchase of an asset to attain an increase in value over a period of time. Investment requires a sacrifice of some present asset, such as time, money, or effort. In finance, the purpose of investing i ...

to make

profit Profit may refer to: Business and law * Profit (accounting), the difference between the purchase price and the costs of bringing to market * Profit (economics), normal profit and economic profit * Profit (real property), a nonpossessory intere ...

. It can also refer to a

bank A bank is a financial institution that accepts deposits from the public and creates a demand deposit while simultaneously making loans. Lending activities can be directly performed by the bank or indirectly through capital markets. Because ...

, or a division of a large bank, which deals with corporations or a large/middle-sized business to differentiate it from a

retail bank Retail banking, also known as consumer banking or personal banking, is the provision of services by a bank to the general public, rather than to companies, corporations or other banks, which are often described as wholesale banking. Banking servi ...

and an

investment bank Investment is the dedication of money to purchase of an asset to attain an increase in value over a period of time. Investment requires a sacrifice of some present asset, such as time, money, or effort. In finance, the purpose of investing is ...

. Commercial banks include private sector banks and

public sector The public sector, also called the state sector, is the part of the economy composed of both public services and public enterprises. Public sectors include the public goods and governmental services such as the military, law enforcement, infra ...

banks.

History

The name ''bank'' derives from the Italian word ''banco'' "desk/bench", used during the

Italian Renaissance The Italian Renaissance ( it, Rinascimento ) was a period in Italian history covering the 15th and 16th centuries. The period is known for the initial development of the broader Renaissance culture that spread across Europe and marked the trans ...

era by Florentine bankers, who used to carry out their transactions on a desk covered by a green tablecloth. 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 an

due to differences in bank regulation. After the

Great Depression The Great Depression (19291939) was an economic shock that impacted most countries across the world. It was a period of economic depression that became evident after a major fall in stock prices in the United States. The economic contagio ...

, through the Glass–Steagall Act, the U.S. Congress required that commercial banks only engage in banking activities, whereas investment banks were limited to

capital market A capital market is a financial market in which long-term debt (over a year) or equity-backed securities are bought and sold, in contrast to a money market where short-term debt is bought and sold. Capital markets channel the wealth of savers t ...

activities. This separation was mostly repealed in 1999 by the Gramm–Leach–Bliley Act.

Role

The general role of commercial banks is to provide financial services to the general public and business, ensuring economic and social stability and sustainable 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.

Primary functions

*Commercial banks accept various types of deposits from the public especially from its clients, including saving account deposits, recurring account deposits, and fixed deposits. These deposits are returned whenever the customer demands it or after a certain time period. *Commercial banks provide loans and advances of various forms, Such as verdraftfacility, cash credit, bill discounting, money at call, etc. They also give demand and

term loan {{Unreferenced, date=March 2018 A term loan is a monetary loan that is usually repaid in regular payments over a set period of time. Term loans usually last between one and ten years, but may last as long as 30 years in some cases. A term loan usua ...

s to all types of clients against proper security. They also act as trustees for wills of their customers etc. *The function of credit creation is generated on the basis of credit and payment intermediary. Commercial banks use the deposits they absorb to make loans. On the basis of check circulation and transfer settlement, the loans are converted into derivative deposits. To a certain extent, the derivative funds of several times the original deposits are increased, which greatly improves the driving force of commercial banks to serve the economic development.

Regulations

In most countries, commercial banks are heavily regulated and this is typically done by a country's

central bank A central bank, reserve bank, or monetary authority is an institution that manages the currency and monetary policy of a country or monetary union, and oversees their commercial banking system. In contrast to a commercial bank, a central ba ...

. They will impose a number of conditions on the banks that they regulate such as keeping bank reserves and to maintain minimum capital requirements.

Services by product

Commercial banks generally provide a number of services to its clients; these can be split into core banking services such as deposits, loans, and other services which are related to payment systems and other financial services.

Core products and services

* Accepting money on various types of

Deposit account A deposit account is a bank account maintained by a financial institution in which a customer can deposit and withdraw money. Deposit accounts can be savings accounts, current accounts or any of several other types of accounts explained below. ...

s * Lending money by

overdraft An overdraft occurs when something is withdrawn in excess of what is in a current account. For financial systems, this can be funds in a bank account. For water resources, it can be groundwater in an aquifer. In these situations the account is s ...

, and

s both secured and unsecured. * Providing transaction accounts * Cash management * Treasury management *

Private equity In the field of finance, the term private equity (PE) refers to investment funds, usually limited partnerships (LP), which buy and restructure financially weak companies that produce goods and provide services. A private-equity fund is both a ty ...

financing * Issuing Bank drafts and

Bank cheque A cashier's check (or cashier's cheque, cashier's order) is a check guaranteed by a bank, drawn on the bank's own funds and signed by a cashier. Cashier's checks are treated as guaranteed funds because the bank, rather than the purchaser, is respo ...

s * Processing payments via

telegraphic transfer Telegraphic Transfer or telex transfer, often abbreviated to TT, is a term used to refer to an electronic means of transferring funds. A transfer charge is often charged by the sending bank and in some cases by the receiving bank. Historically t ...

, EFTPOS,

internet banking Online banking, also known as internet banking, web banking or home banking, is an electronic payment system that enables customers of a bank or other financial institution to conduct a range of financial transactions through the financial inst ...

, or other payment methods.

Other functions

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: * To collect and clear cheques, dividends, and interest warrant * To make payments of rent, insurance premium * To deal in foreign exchange transactions * To purchase and sell securities * To act as the trustee, attorney, correspondent and executor * To accept tax proceeds and tax returns Utility functions include: * To provide safe deposit boxes to customers * To provide money transfer facility * To issue

traveler's cheque A traveller's cheque is a medium of exchange that can be used in place of hard currency. They can be denominated in one of a number of major world currencies and are preprinted, fixed-amount cheques designed to allow the person signing it to ma ...

s * To act as referees * To accept various bills for payment: phone bills, gas bills, water bills * To provide various cards such as

credit card A credit card is a payment card issued to users (cardholders) to enable the cardholder to pay a merchant for goods and services based on the cardholder's accrued debt (i.e., promise to the card issuer to pay them for the amounts plus the o ...

s and

debit card A debit card, also known as a check card or bank card is a payment card that can be used in place of cash to make purchases. The term '' plastic card'' includes the above and as an identity document. These are similar to a credit card, but u ...