Commercial Banks

September 8, 2010Commercial Banksby EW Industries and Business Team


Commercial banks serve the financial needs of businesses. Traditionally, the term commercial bank describes banks that do not engage in investment deals. Nevertheless, the lines blurred since the 1999 repeal of the Glass-Steagall Act, which was a U.S. federal law established in 1933 that barred commercial banks from engaging in investment activity.

Increasingly, commercial banks are involved on Wall Street. This involvement is a large reason why the U.S. government chose to bail out big banks that made risky investments.  Some of those investments that turned sour precipitated the 2008 financial crisis.  Other investment ventures included derivatives like futures, forwards, options and swaps, many of which later became toxic assets at the heart of the economic meltdown.

The dot com bubble of the early 2000s also contributed to risky investment activity. The mixing of banking and investment activity led to funding of sub-standard companies, which caused bubbles that have damaging effects on the economy. However, commercial banks do have separate investment divisions, and individuals and businesses can go to banks for investment advice of any kind.

Commercial banks are government regulated. For example, U.S. banks are required to insure customer deposits up to a certain amount. Banks are ethically obligated to protect customer deposits because fear or uncertainty can drive consumers to withdraw their money on a wide scale, causing panic. Generally, commercial institutions are places where customers can safely keep their money, even though banks have become more daring in recent years.

International Perspective

Outside of the United States, commercial banks are trading banks. European banks, for instance, are not drastically different from American banks, but there are some differences. For one thing, regulatory bodies in Europe frequently require banking shareholders to invest more money when a bank needs capital, and upper managers are more likely to face bonus caps. European banks are also more dependent on short-term borrowing to stay in business because of increased competition. A greater number of banks, including some post offices that compete with commercial banks for bank deposits, exist. European banks must also compete with international banks doing business on their soil.

European banks serve the interests of many different clients from around the world, primarily large businesses. This increased service range makes them more universal in nature. The United States does have universal banks that prioritize larger companies, but American banking centers on meeting the needs of individual clientele, such as investors and business owners. Critics point out that European banks have been focusing too heavily on high-profile clientele, neglecting average people and small businesses.

Commercial Banks and Central Banks

American and European commercial banks interact with central banks. In Britain and the United States, if a commercial bank does not have the assets to meet client demands, then that bank goes to the central bank for additional capital. However, banks must meet certain guidelines to qualify, and the rules vary according to central bank policy.


blog comments powered by Disqus