What is a 'Commercial Bank'
A commercial bank is a financial institution that provides various financial service, such as accepting deposits and issuing loans. Commercial bank customers can take advantage of a range of investment products that commercial banks offer like savings accounts and certificates of deposit. The loans a commercial bank issues can vary from business loans and auto loans to mortgages.
BREAKING DOWN 'Commercial Bank'Commercial banks offer their customers investment products such as savings accounts, checking accounts and certificates of deposit. Bank customers like such products because in the United States, they are secured by a government agency, the Federal Deposit Insurance Corporation (FDIC). In exchange for their money, commercial banks offer their customers interest on their deposits. The way commercial banks make money is by using their customers' deposits for loans with interest rates above the rates they pay to depositors. The spread between what the banks pays out in interest and what it takes in in interest is the bank's net interest income.
The types of loan a commercial bank can issue vary and a commercial bank may specialize in just one or a few types of loans. Commercial banks can offer mortgages, which help borrowers buy homes with the homes as the collateral backing the loans. They can also issue car loans with automobiles as collateral. Commercial banks also can engage in issuing personal loans, lines of credit or credit cards. In addition to the interest it earns on its loan book, a commercial bank can generate revenue by charging its customers fees for mortgages and other banking services.
Evolution of Commercial Banks
The traditional commercial bank is a brick and mortar institution with tellers, safe deposit boxes, vaults and ATMs. However, today some commercial banks do not have any physical branches and require consumers to complete all transactions by phone or Internet. In exchange, such commercial banks generally pay higher interest rates on investments, deposits and charge lower fees as they do not have to maintain physical locations and all the ancillary charges that come along with them such as rent, property taxes and utilities.
Differences with Investment Banks
Commercial banking activities are different than those of investment banking, which include underwriting, acting as an intermediary between an issuer of securities and the investing public, facilitating mergers and other corporate reorganizations, and also acting as a broker for institutional clients. Some commercial banks, such as Citibank and JPMorgan Chase, also have investment banking divisions, while others, such as Ally, operate strictly on the commercial side of the business.