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Study notes

Commercial Banks (Financial Economics)

  • Levels: AS, A Level, IB
  • Exam boards: AQA, Edexcel, OCR, IB, Eduqas, WJEC

Commercial banking relates to deposit-taking and lending. They provide services to corporate and individual customers.

What are commercial banks? - revision video

Some commercial banks have investment banking arms e.g. Bank of America Merrill Lynch

Commercial banks make their profits by taking small, short-term, relatively liquid deposits from retail savers and transforming these into larger, longer maturity loans e.g. in the form of business loans and mortgages

Other services of commercial banks include providing debit and credit cards, private banking, money custody and guarantees, cash management and settlement e.g. through cheque accounts, as well as trade finance.

Main functions of a commercial bank

  • Commercial banks provide retail banking services to household and business customers
  • They are licensed deposit-takers – providing a range of savings accounts
  • They are licensed to lend money (and thereby “create” money e.g. in the form of bank loans, overdrafts and mortgages
  • Commercial banks are profit-seeking
  • A commercial bank’s business model relies on receiving a higher interest rate on the loans (or other assets) than the rate it pays out on its deposits (or other liabilities)
  • This “spread” on their assets and liabilities is used to pay the operating expenses of a bank and also to make a profit

Objectives of a Commercial Bank

  • Commercial banks are profit-seeking businesses
  • Their main objective is to achieve a profit by earning more from the interest charged on loans than the interest paid to depositors
  • Commercial banks can also make profits from providing other services such as deposit security, currency trading, business advice, cheque and credit-card processing
  • Most commercial banks are privately owned but some in the UK are part or majority-owned by the UK government
  • The UK government owns 73% of Royal Bank of Scotland
  • It also owns a 10% minority stake in Lloyds Banking Group
Revision Webinar Commercial Banks and the UK Economy - revision video

View our full revision video playlist on Commercial Banks:

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