commercial bank

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Commercial bank

Bank that offers a broad range of deposit accounts, including checking, savings and time deposits and extends loans to individuals and business. Commercial banks can be contrasted with investment banking firms, such as brokerage firms, which generally are involved in arranging for the sale of corporate or municipal securities.

Commercial Bank

A bank offering checking accounts, savings accounts, certificates of deposit, personal and business loans, and other, similar services. Commercial banks charge fees and/or interest for many of their services, though they may pay interest on other services. A retail bank is often an individual branch of a commercial bank where one may procure these services. A commercial bank contrasts with an investment bank, though their services have become more intertwined since the late 1990s.

Commercial bank.

Commercial banks offer a full range of retail banking products and services, such as checking and savings accounts, loans, credit cards, and lines of credit to individuals and businesses.

Most commercial banks also sell certain investments and many offer full brokerage and financial planning services.

commercial bank

or

clearing bank

A BANK which accepts deposits of money from persons and businesses and provides them with a payments transmission service and various saving and loan facilities.

Commercial banking in the UK is conducted on the basis of an interlocking branch network system, which caters for local and regional needs as well as allowing the major banks such as Barclays, Lloyds, NatWest and the HSBC to cover the national market. Increasingly, the leading banks have globalized their operations to provide traditional banking services to international companies as well as diversifying (see DIVERSIFICATION) into a range of related financial services such as the provision of MORTGAGES, INSURANCE and UNIT TRUST investment.

Bank deposits are of two types:

  1. sight deposits, or current account deposits, which are withdrawable on demand and which are used by depositors to finance day-to-day personal and business transactions as well as to pay regular commitments such as instalment credit repayments. Most banks now pay interest on outstanding current account balances;
  2. time deposits, or deposit accounts, which are usually withdrawable subject to some notice being given to the bank and which are held as a form of personal and corporate saving and to finance irregular, ‘one-off payments.

Interest is payable on deposit accounts, normally at rates above those paid on current accounts, in order to encourage clients to deposit money for longer periods of time, thereby providing the bank with a more stable financial base.

Customers requiring to draw on their bank deposits may do so in a number of ways; direct cash withdrawals are still popular and have been augmented by the use of cheque/'cash cards for greater convenience (i.e. cheque/cash cards can be used to draw cash from a dispensing machine outside normal business hours). However, the greater proportion of banking transactions are undertaken by cheque and CREDIT CARD payments and by such facilities as standing orders and direct debits. Some of these services, like cheque payments for customers in current account surplus, are provided free, while for others a small charge is made. Payment by cheque is the commonest form of non-cash payment involving the drawer detailing the person or business to receive payment and authorizing his bank to make payment by signing the cheque, with the recipient then depositing the cheque with his own bank. Cheques are ‘cleared’ through an inter-bank CLEARING HOUSE SYSTEM with customers’ accounts being debited and credited as appropriate. Credit cards enable a client of the bank to make a number of individual purchases of goods and services on CREDIT over a particular period of time which are then settled by a single debit to the person's current account, or, alternatively, paid off on a loan basis (see below).

Under a standing order arrangement, a depositor instructs his bank to pay from his account a regular fixed sum of money into the account of a person or firm he is indebted to, again involving the respective debiting and crediting of the two accounts concerned. In the case of a direct debit, the customer authorizes the person or firm to whom he is indebted to arrange with his bank for the required regular payment to be transferred from the account.

Commercial banks have the dual objective of being able to meet money withdrawals on demand and of putting their resources to profitable use (i.e. they are in business to make profits for their shareholders). This influences the structure of their asset holdings. A proportion of the banks' funds are held in a highly liquid form (till money, ‘call money’ with the DISCOUNT MARKET, BILLS OF EXCHANGE and TREASURY BILLS) to cover short-term needs. The remaining funds are deployed in areas yielding a higher return, specifically portfolio investment, in particular government BONDS and corporate fixed interest securities such as DEBENTURES and, to a much greater extent, in the provision of bank loans (bank advances) to personal and corporate borrowers. Loans are used by personal borrowers to finance the purchase of a variety of products, while they are a major source of WORKING CAPITAL finance for businesses, covering the purchase of short-term assets such as the materials and components and the financing of work in progress and the stockholding of final products. Loans may be for a specified amount and made available for fixed periods of time at agreed rates of interest, or take the form of an overdraft facility where the person or firm can borrow as much as they require up to a prearranged total amount and is charged interest on outstanding balances. In recent years, the banks have introduced more flexible and varied loan arrangements for clients of suitable creditworthiness, which enables them to borrow money on a more or less continuous basis without the formality of having to make separate loan applications.

In recent times the commercial banks have been markedly affected by changes introduced by the FINANCIAL SERVICES ACT, 1986 which has allowed other financial institutions to set themselves up as ‘financial supermarkets’ offering customers a banking service and a wide range of personal financial products, including insurance, mortgages, personal pensions, unit trusts and individual savings accounts (ISAs) etc. This development has introduced a powerful new competitive impetus into the financial services industry breaking down traditional ‘demarcation’ boundaries in respect of ‘who does what’, allowing banks to ‘cross sell’ these services and products in competition with traditional providers such as the BUILDING SOCIETIES, INSURANCE COMPANIES, UNIT TRUSTS etc.

This and other developments (in particular, the globalization of investment banking) have in turn caused a number of structural changes. Intra and inter takeovers-mergers have occurred (e.g. The Lloyds-TSB Banks' tie-up and their takeover of Cheltenham and Gloucester building society); foreign banks have increasingly moved into the UK through either takeover (e.g. Hong Kong and Shanghai Banking Corp's takeover of the Midland Bank and Deutsche Bank's acquisition of Morgan Grenfell investment house) or setting up local offices; building societies such as the Abbey National, Woolwich and Halifax have converted themselves into banks. Direct banking services (via the telephone and the internet) have increasingly taken market share away from traditional branch networks. This has led to pressure on banks to cut costs by reducing the number of their branches. Another notable development has been the rapid rise in ATMs (automatic till machines, referred to popularly as ‘hole in the wall’ machines). See MONEY SUPPLY, BANKING SYSTEM, BANK OF ENGLAND, MONETARY POLICY, LOAN GUARANTEE SCHEME, VENTURE CAPITAL, SHARE PURCHASE/SALE.

commercial bank

or

clearing bank

a BANK that accepts deposits of money from customers and provides them with a payments transmission service (CHEQUES), together with saving and loan facilities.

Commercial banking in the UK is conducted on the basis of an interlocking ‘branch’ network system that caters for local and regional needs as well as allowing the major banks, such as Barclays and NatWest, to cover the national market. Increasingly the leading banks have globalized their operations to provide traditional banking services to international companies as well as diversifying into a range of related financial services such as the provision of MORTGAGES, INSURANCE and UNIT TRUST investment and SHARE PURCHASE/SALE.

Bank deposits are of two types:

  1. sight deposits, or current account deposits, which are withdrawable on demand and which are used by depositors to finance day-to-day personal and business transactions as well as to pay regular commitments such as instalment credit repayments. Most banks now pay interest on outstanding current account balances;
  2. time deposits, or deposit accounts, which are usually withdrawable subject to some notice being given to the bank and which are held as a form of personal and corporate saving and to finance irregular, ‘one-off payments. Interest is payable on deposit accounts, normally at rates above those paid on current accounts, in order to encourage clients to deposit money for longer periods of time, thereby providing the bank with a more stable financial base.

Customers requiring to draw on their bank deposits may do so in a number of ways: direct cash withdrawals are still popular and have been augmented by the use of cheque/cash cards for greater convenience (i.e. cheque/cash cards can be used to draw cash from a dispensing machine outside normal business hours). However, the greater proportion of banking transactions is undertaken by cheque and CREDIT CARD payments and by such facilities as standing orders and direct debits. Payment by cheque is the commonest form of non-cash payment involving the drawer detailing the person or business to receive payment and authorizing his bank to make payment by signing the cheque, with the recipient then depositing the cheque with his own bank. Cheques are ‘cleared’ through an interbank CLEARING HOUSE SYSTEM, with customers’ accounts being debited and credited as appropriate (See also BACS). Credit cards enable a client of the bank to make a number of individual purchases of goods and services on CREDIT over a particular period of time, which are then settled by a single debit to the person's current account or, alternatively, paid off on a loan basis (see below).

Under a standing order arrangement, a depositor instructs his bank to pay from his account a regular fixed sum of money into the account of a person or firm he is indebted to, again involving the respective debiting and crediting of the two accounts concerned. In the case of a direct debit, the customer authorizes the person or firm to whom he is indebted to arrange with his bank for the required regular payment to be transferred from his account.

Commercial banks make loans to personal borrowers to finance the purchase of a variety of products, while they are a major source of WORKING CAPITAL finance for businesses covering the purchase of short-term assets such as materials and components and the financing of work-in-progress and the stockholding of final products. Loans may be for a specified amount and may be made available for fixed periods of time at agreed rates of interest, or may take the form of an overdraft facility where the person or firm can borrow as much as is required up to a pre-arranged total amount and is charged interest on outstanding balances.

A commercial bank has the dual objective of being able to meet currency withdrawals on demand and of putting its funds to profitable use. This influences the pattern of its asset holdings; a proportion of its funds are held in a highly liquid form (the RESERVE ASSET RATIO), including TILL MONEY, BALANCES WITH THE BANK OF ENGLAND, CALL MONEY with the DISCOUNT MARKET, BILLS OF EXCHANGE and TREASURY BILLS.

These liquid assets enable the bank to meet any immediate cash requirements that its customers might make, thereby preserving public confidence in the bank as a safe repository for deposits. The remainder of the bank's funds are used to earn profits from portfolio investments in public sector securities and fixed-interest corporate securities, together with loans and overdrafts.

In recent times, the commercial banks have been markedly affected by changes introduced by the FINANCIAL SERVICES ACT 1986, which has allowed other financial institutions to set themselves up as ‘financial supermarkets’, offering customers a banking service and a wide range of personal financial products, including insurance, mortgages, personal pensions, unit trusts and individual savings accounts (ISAs), etc. This development has introduced a powerful new competitive impetus into the financial services industry, breaking down traditional ‘demarcation'boundaries in respect of ‘who does what’, allowing banks to ‘cross-sell’ these services and products in competition with traditional providers such as the BUILDING SOCIETIES, INSURANCE COMPANIES, UNIT TRUSTS, etc.

This and other developments (in particular, the globalization of investment banking) have in turn caused a number of structural changes. Intra- and inter-takeovers-mergers have occurred (e.g. the Lloyds-TSB Banks’ tie-up and their takeover of the Cheltenham and Gloucester building society); foreign banks have increasingly moved into the UK through either takeover (e.g. Hong Kong and Shanghai Banking Corp's takeover of the Midland Bank and Deutsche Bank's acquisition of the Morgan Grenfell investment house) or by setting up local offices; building societies such as the Abbey National, Woolwich and Halifax have converted themselves into banks. Direct banking services (via the telephone and the internet) have increasingly taken market share away from traditional branch networks. This has led to pressure on banks to cut costs by reducing the number of their branches. Another notable development has been the rapid rise in ATMs (AUTOMATIC TELLER MACHINES, referred to popularly as ‘hole in the wall’ machines).

The commercial banks play a unique role in a country's monetary system through their capacity to engage in multiple BANK DEPOSIT CREATION by providing credit through loans and overdrafts. Bank deposits constitute by far the largest single component of the broad MONEY SUPPLY (especially M4) and as such are a crucial target for the application of MONETARY POLICY in controlling the economy. See MONEY SUPPLY DEFINITIONS, BANK OF ENGLAND. See alsoEFTPOS.

commercial bank

A financial institution authorized to receive both time (savings accounts,CDs) and demand (checking accounts) deposits, to make loans of various types, to engage in trust services, to issue letters of credit, to accept and pay drafts, to rent safety deposit boxes, and to engage in similar activities and ventures.