Commercial banking is that group of entities that carry out financial intermediation as an economic activity. That is, they capture savings from the public and with those resources they grant loans.
Commercial banking then groups together all commercial banks, institutions that receive deposits and, in turn, extend credits.
The business of commercial banking is in the difference between the interest rate paid for savings, and the rate charged for financing granted.
Thus, the interest offered by a savings account should be less than that required of borrowers. In this way, the intermediary is left with a profitability.
They differ from investment banking, in that the latter is dedicated to obtaining funds to make a medium and long-term investment as its main purpose. Additionally, it should be noted that an investment bank is part of the investment banking sector and a commercial bank is part of the commercial banking sector.
Operations carried out by commercial banks
The operations carried out by commercial banking can be differentiated into two categories:
- Passive: These are operations by which funds are raised from the public in exchange for a return. We are talking about instruments such as:
- Savings accounts: They pay a periodic return to the user for saving their money. They allow operations such as transfers and payments from that account.
- Time deposits: Unlike a savings account, the client must keep his capital immobilized in the financial institution. This, for a specified time, for example, six months. In return, you pay a higher return than that of a savings account.
- Active: Are those where the financial institution offers a product in exchange for charging an interest rate. They stand out:
- Credit card : Allows the user to make purchases which they can cancel in a single payment at the end of the period, or they can choose to divide the loan into installments, for example, into six monthly payments.
- Mortgage loans: They allow the client to finance the acquisition of a property, for which monthly payments will be made over a long term, which can even exceed twenty years.
- Working capital loan: Offers companies the necessary resources so that the company can operate on a daily basis. That is, said credit will allow the entity to have the funds to acquire inputs, pay wages to workers, among others.
Commercial banking and regulation
Commercial banking is usually subject to the regulation of the corresponding state entity. This supervises that commercial banks, for example, remain solvent and carry out operations with sufficient support to face credit or default risk.
We must also take into account that commercial banks must keep immobilized, by law, a percentage of the deposits it captures. Said reserve will be kept in the respective central bank or monetary authority.