What are Commercial Banks? (Financial Economics)

This short revision video looks at the core functions of commercial banks in the UK.

• Commercial banks provide retail banking services to household and business customers
• They are licensed deposit-takers – providing a range of savings accounts for households and businesses
• They are licensed to lend money (and thereby “create” money e.g. in the form of loans, overdrafts and mortgages
• Commercial banks can also make profits from providing other services such as deposit security, currency trading, business advice, cheque and credit-card processing
• 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