Definition
A Commercial Bank is a financial institution that provides a plethora of financial services to both the general public and businesses. These services include managing current accounts, receiving deposits, disbursing notes and coins, granting loans, offering trustee and executor services, supplying foreign currency, trading securities, providing insurance, running a credit-card system, and managing personal pensions. They also engage in activities traditionally associated with merchant banks, such as providing venture capital and participating in financial market trading, as well as competing with building societies for mortgaging services.
Features and Functions
Commercial banks boast a wide array of functions:
- Operating Current Accounts: Facilitate day-to-day transactions for customers.
- Receiving Deposits: Accept money deposits and pay interest on savings.
- Making Loans: Provide short-term to long-term loans to individuals and businesses.
- Currency Exchange: Offer supply and exchange of foreign currencies.
- Securities Trading: Buy and sell securities on behalf of customers.
- Insurance Services: Provide various insurance products.
- Credit-Card Systems: Issue and manage credit cards.
- Personal Pensions: Offer and manage pension schemes for individuals.
Examples
- Royal Bank of Scotland Group (Including NatWest)
- Barclays
- Lloyds (Including HBOS)
- HSBC
- Santander Group (Including Abbey, and Alliance and Leicester)
Frequently Asked Questions
What distinguishes commercial banks from merchant banks?
Commercial banks offer a broad range of services to the public and businesses, including deposit-taking and lending, while merchant banks typically focus on investment banking services such as underwriting, corporate finance, and advisory services.
How do commercial banks generate profit?
They primarily generate profit through interest on loans, fees from service charges, and trading revenues from securities.
Are commercial banks the same as high-street banks?
Yes, commercial banks are often referred to as high-street banks in the UK, indicating their prominent presence on main retail streets.
What role did commercial banks play in the 2008-09 financial crisis?
During the financial crisis, commercial banks faced significant losses from bad loans and toxic investments, leading to a need for government bailouts in some cases.
Can commercial banks invest in venture capital?
Yes, some commercial banks provide venture capital and participate in financial markets, functions traditionally associated with merchant banks.
What is the UK government’s relationship with commercial banks post-2008?
Post-crisis, the UK government holds major stakes in some commercial banks, like Lloyds and the Royal Bank of Scotland, through UK Financial Investments.
Related Terms
- Merchant Bank: Specializes in investment banking services including underwriting and providing advisory services.
- Building Society: Financial institution primarily offering savings accounts and mortgage lending.
- High-Street Banks: Another term for commercial banks, highlighting their presence in retail banking.
- RBS Group: One of the major banking groups in the UK, including NatWest.
- UK Financial Investments: Entity managing UK government stakes in financial institutions post-2008 crisis.
Online Resources
- Investopedia - Commercial Bank
- Bank of England - Commercial Bank Money
- Barclays - Personal Banking Services
Suggested Books for Further Reading
- “Principles of Banking” by Gup and Kolari.
- “Commercial Banking: The Management of Risk” by Benton E. Gup and James W. Kolari.
- “Bank Management & Financial Services” by Peter Rose and Sylvia Hudgins.
Accounting Basics: “Commercial Bank” Fundamentals Quiz
Thank you for investing time in understanding commercial banks. The detailed exploration and accompanying quiz aim to deepen your financial knowledge!
