Commercial Bank

A commercial bank is a depository institution that accepts deposits, makes loans to individuals and businesses, and provides payment services such as checking accounts and debit cards. The term has no single definition in consumer law, but federal agencies use it as a formal category: the Federal Deposit Insurance Corporation classifies each insured institution by charter type as a "commercial bank or savings institution," and the Federal Reserve publishes an estimated weekly balance sheet for "all commercial banks in the United States."

Three kinds of commercial bank, three supervisors. The FDIC's charter classes sort commercial banks by who granted the charter and whether the bank belongs to the Federal Reserve System. A national bank holds a federal charter and is supervised by the Office of the Comptroller of the Currency; national banks must also be members of the Federal Reserve System (12 U.S.C. 222). A state-chartered bank that has joined the Federal Reserve is supervised by the Federal Reserve, and a state-chartered bank that has not is supervised by the FDIC (12 U.S.C. 1813(q)). Every state-chartered bank is also supervised by its state banking department.

What it is distinguished from. Savings institutions, the savings banks and savings associations sometimes called thrifts, are a separate FDIC charter class. Ownership is a second line: the FDIC records each insured institution as either a stock institution, "owned by the shareholders who benefit from profits earned by the institution," or a mutual institution, "owned and controlled solely by its depositors," and a national bank's capital stock is divided into shares by statute (12 U.S.C. 52). Credit unions take deposits and make loans too, but they are not-for-profit cooperatives owned by their members and insured by the NCUA rather than the FDIC. An investment bank underwrites and trades securities; since 1999 a commercial bank can sit in the same corporate family as a securities firm under the Gramm-Leach-Bliley Act, but the bank itself is still the deposit-taking entity.

Why economists use the term. The Federal Reserve's money statistics count "demand deposits at commercial banks" as part of M1, and its H.8 release tracks commercial banks' combined assets and liabilities each week. When an article says commercial banks are lending more or less, it is describing these aggregate balance sheets, which the Fed uses to track credit and funding conditions.

For a depositor, the label matters less than two facts. Whether a particular bank is insured, and which agency supervises it, can both be checked: the FDIC's BankFind tool shows insurance status and charter class, and the OCC's HelpWithMyBank site has a regulator search. Deposit insurance works the same way at every insured bank, up to $250,000 per depositor, per insured bank, for each ownership category.

A commercial bank gathers deposits, keeps part of them available to meet withdrawals and payments, and lends or invests the rest. It earns income from the difference between the interest it collects on loans and securities and the interest it pays depositors, plus fees for services such as account maintenance, card payments and wires.

An example with round, illustrative numbers: a small bank holds $500 million of deposits on which it pays an average of 1.5% a year, or $7.5 million in interest. It has $400 million out in loans earning an average of 6.5%, which brings in $26 million. Before salaries, branch costs, loan losses and taxes, the lending spread produces $26 million − $7.5 million = $18.5 million. Each depositor's balance is insured by the FDIC up to $250,000 per ownership category, which is why a customer does not need to inspect the bank's loan book before opening an account.

Pros

• Deposits at an insured commercial bank carry federal deposit insurance up to the standard limit.
• Commercial banks offer the full set of everyday services in one place: checking, savings, cards, loans and transfers.
• Every commercial bank has an identifiable federal supervisor and, for state banks, a state supervisor as well, with complaint processes at each.

Cons

• At a stock-owned bank the profits belong to the shareholders, so depositors are customers rather than owners, unlike a credit union's members.
• Deposit insurance has a limit, so balances above $250,000 in one ownership category at one bank are not fully covered.
• The same word "bank" covers institutions with very different supervisors and rules, so the label alone tells a customer little.