Commercial bank

Commercial bank
Iain Hector · CC BY 3.0 · source
Name	Commercial bank
Type	Financial institution
Industry	Banking
Services	Deposit taking; lending; payment services

Commercial bank.

A commercial bank is a financial institution that accepts deposits, makes loans, and provides payment services. Major examples include JPMorgan Chase, HSBC, Bank of America, Deutsche Bank, and Barclays, while national banking systems feature institutions such as the Reserve Bank of India and the People's Bank of China. Commercial banks operate within frameworks shaped by instruments like the Basel III accords, national central banks such as the Federal Reserve System and the European Central Bank, and legislation exemplified by the Glass–Steagall Act and the Dodd–Frank Act.

Overview

Commercial banks perform intermediation between savers and borrowers and facilitate payments among firms such as Apple Inc., Toyota Motor Corporation, Siemens, and Walmart. They serve customers ranging from individuals to corporations and public entities like the United Nations agencies and subnational governments such as the London Borough of Camden. In markets influenced by institutions like the World Bank, International Monetary Fund, and regional development banks, commercial banks provide credit, liquidity, and cash-management services critical to trade networks involving ports like the Port of Shanghai and exchanges such as the New York Stock Exchange.

History

Banking evolved from medieval moneylenders and merchant houses, including Medici Bank and Rothschild family houses, through the establishment of central issuers like the Bank of England and modern corporate banks such as Credit Suisse. Pivotal events shaping commercial banking include the South Sea Bubble, the Panic of 1907, the Great Depression, and the Global financial crisis of 2007–2008. Legal and regulatory milestones include the Banking Act of 1933 and reforms after crises influenced by reports like the Turner Review and inquiries such as the Financial Crisis Inquiry Commission.

Functions and Services

Commercial banks provide deposit accounts used by retailers like Tesco and service providers such as Accenture, lending to borrowers that include General Electric and ExxonMobil, and payment infrastructures connected to networks like SWIFT, Visa, and Mastercard. Ancillary services include trade finance for exporters to markets like Brazil and India, foreign exchange for corporates operating in Shanghai Free-Trade Zone contexts, custodial services for asset managers such as BlackRock, and wealth management for families linked to dynasties like the House of Saud.

Regulation and Supervision

Supervisory frameworks rest on central banks including the Bank of Japan and authorities such as the Prudential Regulation Authority and the Securities and Exchange Commission (United States), complemented by international standards from the Basel Committee on Banking Supervision. Deposit insurance schemes like the Federal Deposit Insurance Corporation and the Deposit Insurance Corporation of Japan protect retail deposits. Post-crisis regimes implemented stress testing by regulators modeled on scenarios used by the Federal Reserve and resolution mechanisms exemplified by the Single Resolution Mechanism.

Business Models and Structure

Commercial banks adopt retail, corporate, and investment banking divisions as seen in groups like Goldman Sachs and Citigroup. Structures range from universal banks such as BNP Paribas and Mitsubishi UFJ Financial Group to narrow banks and savings institutions like Santander and cooperative models exemplified by Rabobank. Funding sources include wholesale markets, interbank facilities like the London Interbank Offered Rate (historically) and capital markets where they issue instruments traded on exchanges like Euronext.

Risks and Risk Management

Banks face credit risk from borrowers including sovereigns such as Greece and corporations, market risk tied to securities issued by entities like Tesla, Inc., operational risk illustrated by incidents at firms like Equifax and Barclays fines, liquidity risk during episodes like the 2008 Icelandic banking collapse, and systemic risk identified in network analyses of institutions such as Lehman Brothers. Risk management employs techniques and tools originating from quantitative finance research at institutions like Princeton University and London School of Economics, monitoring metrics such as capital ratios mandated by Basel III and conducting internal controls inspired by standards such as the COSO framework.

Economic Role and Impact

Commercial banks influence credit allocation to sectors including manufacturing conglomerates like Siemens AG, agriculture exporters in Argentina, and technology startups backed by firms like SoftBank. Their role in monetary transmission links them to policy actions by the Federal Open Market Committee and fiscal interactions with treasury departments such as the United States Department of the Treasury. Crises involving major banks have prompted policy responses by supranational actors like the G20 and reshaped financial architecture through initiatives led by the Financial Stability Board.

Category:Banks