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Financial institution From Wikipedia, the free encyclopedia
A commercial bank is a financial institution that accepts deposits from the public and gives loans for the purposes of consumption and investment to make a profit.
It can also refer to a bank or a division of a large bank that deals with corporations or large or middle-sized businesses, to differentiate from retail banks and investment banks. Commercial banks include private sector banks and public sector banks. However, central banks function differently from commercial banks, despite a common misconception known as the "bank analogy". Unlike commercial banks, central banks are not primarily focused on generating profits and cannot become insolvent in the same way as commercial banks in a fiat currency system.[1]
The name bank derives from the Italian word banco 'desk/bench', used during the Italian Renaissance era by Florentine bankers, who used to carry out their transactions on a desk covered by a green tablecloth.[2] 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 investment bank due to differences in bank regulation. After the Great Depression, 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 activities. This separation was mostly repealed in 1999 by the Gramm–Leach–Bliley Act.
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.
Regulations
In most countries, commercial banks are heavily regulated and this is typically done by a country's central bank. They will impose a number of conditions on the banks that they regulate such as keeping bank reserves and to maintain minimum capital requirements. They also require some capital
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.
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:
Utility functions include:
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