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What Are Commercial Banks? - Definition, Roles & Functions

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  • 0:01 Defining Commercial Bank
  • 0:35 Functions
  • 1:23 Role in Economy
  • 2:41 Lesson Summary
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Lesson Transcript
Instructor: Shawn Grimsley
You may not realize it, but there are different types of banks and not all banks are authorized to do the same things. In this lesson, you'll learn about commercial banks, including their role and function in an economy. A short quiz follows.

Defining Commercial Bank

A commercial bank is a financial institution that is authorized by law to receive money from businesses and individuals and lend money to them. Commercial banks are open to the public and serve individuals, institutions, and businesses. A commercial bank is almost certainly the type of bank you think of when you think about a bank because it is the type of bank that most people regularly use.

Banks are regulated by federal and state laws depending on how they are organized and the services they provide. Commercial banks are also monitored through the Federal Reserve System.

Functions

A commercial bank is authorized to serve the following functions:

  • Receive deposits - take money in from individuals and businesses (called depositors)
  • Disburse payments - make payments upon the direction of its depositors, such as honoring a check
  • Collections - a bank will act as your agent to collect funds from another bank payable to you, such as when someone pays you by check drawn on an account from a different bank
  • Invest funds in securities for a return
  • Safeguard money - banks are considered a safe place to store your wealth
  • Maintain and service savings and checking accounts of its depositors
  • Maintain custodial accounts - accounts controlled by one person but for the benefit of another person, such as a trust account
  • Lend money

Role in Economy

Commercial banks are probably the largest source of financing for private capital investment in the country. A capital investment is the purchase of an asset with the intention of you either generating income from the asset, the asset appreciating in value over time, or both. Common capital purchases made by businesses include things like plants and equipment. The quintessential capital purchase by individuals is the purchase of their homes.

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