There are two popular kinds banking institutions in every established country. One kind of banking institution is known as a central bank. Central banks are the supreme authority in the banking industry. The other kind of banking institution is known as a commercial bank. A commercial bank is regulated and under the direct authority of a central bank. If you would like more information as to what a central bank is, be sure to visit my page about the subject by clicking this central bank link.
Are you aware as to what a commercial bank is and what its primary responsibilities are? If you aren’t then allow me to will enlighten you. Just continue to eat up the contents of this page and you will obtain a good understanding of what a commercial bank is and what some of its responsibilities entail.
What is a Commercial Bank
A commercial bank is an institution that provides banking services to the public by accepting deposits of money and making it available for withdrawal, primarily through checking and savings accounts, providing loans to individuals and businesses (a commercial banks primary way of earning profits) and providing a host of investment services such as high interest savings accounts, certificate of deposits, money market accounts and more. Let’s go into more detail regarding the most widespread responsibilities of a commercial bank.
Checking and Savings Accounts: The Most Universal Services Offered by Commercial Banks
First up is the checking account. There is a good chance that you have a checking account with some commercial bank somewhere. But if you don’t and you aren’t familiar with it, let me share with you what one is. A checking account is a service provided by a commercial bank, and possibly other kinds financial institutions, where one can deposit money, which is generally some type of currency, for safe keeping and storage and where one can withdraw and use the funds deposited at anytime for any purpose.
A checking account is also known as an ‘on-demand account’ simply for the fact that one can demand the money deposited at anytime. Oh, I don’t want to forget that the term ‘checking account’ is used very frequently in the United States. But it is also known as a chequing account and current account elsewhere.
Competing commercial banks are known to pay checking account holders interest on the amount of money deposited to entice the public to bank with them rather than their competitors. Usually, the amount of interest offered is rather miniscule in my opinion. A country’s inflation rate is typically higher than the interest rate offered by commercial banks for checking accounts which would wipe away any earnings an put everyone into a deficit.
Next is the savings account. This too is a very popular service offered by commercial banks worldwide. A savings account works much like a checking account for it is a service provided by a commercial bank where one can deposit money, usually currency, for the purpose of keeping one’s money safe and secure as well as earning interest on it. The interest offered for savings accounts are generally higher than the interest offered for checking accounts. The only catch is that money deposited into a savings account is usually less accessible or can not be accessed ‘on-demand’ like a checking account can. A savings account is perfect for those who simply want to save money (that’s why it’s called a savings account) and not use it for day to day transactions.
Fractional Reserve Banking: Commercial Banks Expand the Money Supply
Central banks have the power to create money and issue it whenever it wants. Once money has been created and issued, the money eventually ends up in a commercial bank primarily through deposits from individuals and businesses. Through fractional reserve banking, a commercial bank can lend more money than what exactly exists. Mind blowing, huh? A commercial bank can lend more money than it has by just making it up out of nothing. How? I don’t know how, but they do.
A commercial bank can with either loan money that doesn’t exist to a borrower or credit the accounts of the depositors with money that doesn’t exist due to the depositors’ money being lent to the borrower. One of the two happens (or both). It could depend on the bank and the country it’s in. That’s why it’s called fractional reserve banking. A commercial bank can lend more than it has in profits and so uses its reserves and thus can only back up a fraction of what it actually took in from deposits. That is how the money supply of an economy is expanded through commercial banking.
Oh, let’s not forget the central banks. The central banks know that commercial banks only keep a fraction of the deposits they receive, so one of the regulations that central banks make commercial banks adhere to is the reserve requirement. Central banks basically tell the commercial banks how much reserve they must have to ensure the the commercial banks don’t expand the money supply to rapidly and to make sure that they can honor the demand deposits.