Commercial Bank
Commercial Bank
A financial institution that maintains customer deposits, extends loans, processes payments, and connects households and businesses to the broader banking system.
Commercial bank is a financial institution that accepts deposits and provides loans.
Commercial Banks Create Their Own Liabilities
A customer's bank deposit is a liability of the commercial bank, not a reserve balance at the central bank. When a bank extends a new loan, it can create a new deposit liability on its own balance sheet.
Commercial banks therefore play an active role in money and credit creation rather than functioning only as passive intermediaries between existing savers and borrowers.
What Is a Commercial Bank?
Commercial banks provide accounts and payment services to households and businesses while also making loans and holding financial assets.
Their role places them at the intersection of money, credit, payments, and financial intermediation.
Core Functions
Although banks differ in size and business model, several functions are common.
Commercial Bank vs. Central Bank
The distinction between these institutions is essential.
Creates loans and deposit liabilities for customers and operates as a financial intermediary and lender.
Issues central-bank liabilities, administers monetary policy, and supports the settlement framework for the banking system.
Commercial Banks in the Monetary System
A simplified relationship is:
Why It Matters for Monetary Literacy
Commercial banks are central to the creation and circulation of deposit money. Understanding what they do makes it easier to distinguish bank deposits from reserves, lending from simple intermediation, and liquidity from solvency.
Commercial banks are not merely places where money is stored; they are balance-sheet institutions that create credit, deposits, and payment claims.
Explore the Banking System
Continue exploring how commercial banks, deposits, credit, balance sheets, liquidity, and monetary policy interact throughout the modern monetary system.