Commercial banks act as intermediaries in moving money through the market, offering services such as checking, deposit, and savings accounts. They cannot underwrite loans or issue securities, but can make loans directly to customers for additional income.
Commercial banks play an important role in an economic society; In many ways, they represent intermediaries that move money through the market. There may be different types of commercial banks, and each type offers different services. An underlying similarity to these banks is their inability to underwrite loans and create deals that issue securities to investors. The most common types of commercial banks include checking, deposit, and savings banks, and many of these activities are offered at a single institution. These banks are also engaged in commercial banking and lending.
The most basic types of commercial banks are those that only offer checking and deposit services. Checking accounts allow consumers to deposit money into a portfolio account and draw on it at a later time. The longer a customer leaves money in the bank, the greater opportunities the financial institution has to invest the money. Banks never hold all of a consumer’s money in its entirety in the bank’s vault. Instead, it lends the money in loans or buys securities at the bank level to earn money, so the institution can remain solvent.
Banks that are dedicated to basic services may also offer savings accounts in addition to checking accounts. These accounts are very similar to checking accounts, although many types of savings accounts offer small interest rates that reward consumers for depositing money in the bank. These commercial banks use the interest payments to induce more consumers to open accounts with the bank. With more accounts, more money goes into the bank, and often the end result is more loans made to other parties. Money market savings accounts may also be options at these basic commercial banks.
The next level of commercial banks are those that make loans directly to consumers or those who use banking services. Rather than making loans to other parties or those not affiliated with the bank, lending to bank customers allows the financial institution another source of income. The interest charged on the loan goes back into the bank’s coffers and allows it to grow and expand into other markets. These types of commercial banks may be more common among business customers, who are looking for not only basic banking service but also the ability to obtain loans from reasonable sources. These types of commercial banks may also offer letters of credit, performance bonds, or other commitments for commercial use in a market.
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