Role of Commercial Bank in Industrial Sector
Commercial banks are extremely important in industry, by providing the loanable funds that these industries need to expand and develop. Banks are also involved with industry in other ways, like by securing and providing access to financial transactions and financial accounts like checking and electronic transfer services; by securing agreements between parties concerning leases, ownership and contracts; or by safekeeping of documents and other items in safe-deposit boxes and in safes. Most importantly to commercial banks, though, is loanable funds. The primary function of banks in economics is to aggregate small surpluses in savings and to loan out these aggregated chunks of capital to firms trying to invest.
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History
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Banking activity has occurred steadily with more complexity since Florentine merchants in the 12th century, but it wasn't until the 1930s that commercial banks were technically created. During the period before the Great Depression, all banks were essentially similar. After the disaster, Congress required that banks be separated into investment banks--those that deal with capital markets and engage in capital market activities--and commercial banks, which were to deal with checking accounts and savings accounts as a usual bank. The two are no longer separate under U.S. law, so the term "commercial bank" has come to suggest those banks that focus on corporations or large business (compared to retail banking services). Today commercial banks are a hugely important part of how firms acquire and use capital to finance everyday activities.
Loanable Funds
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Commercial banks are primarily important to industry and the industrial sector because of the loans that they give out. Specifically, commercial banks give out loans to those that are interested in expanding investing activities. This might include secured loans--where the borrower has pledged some certain asset (such as a building) as collateral--or unsecured loans, which include loans like corporate bonds, credit card loans (debt) and personal loans. Business is done with these loans on a regular basis.
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The Price of Loanable Funds
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The cost of loanable funds given from a commercial bank to a manufacturer in an industry is the interest rate on the loan. Interest rates are determined by the supply and demand for loanable funds: how many people are interested in obtaining investment capital and how much they're willing to pay, along with how many loaners are interested in loaning investment capital and how much they're willing to loan at certain interest rates. These factors come together to achieve an agreed-upon price for a certain type of loans. When loans are priced either too high or too low, sellers of loans will find either excess demand leading to a shortage of funds or weak demand leading to a surplus. Either way, it is in the best interest of the bank for the loan to be changed to an equilibrating value.
Size
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The global banking industry is enormous. U.S. banks have about a 14 percent share of world banking power, and worldwide assets of the largest 1,000 banks at the end of 2007 reached close to $75 trillion. Not all of these could be considered "commercial banks" in the colloquial sense: the problem is that deciding between what makes a corporate bank and what makes a retail bank will be an arbitrary decision. The United States has the largest number of banking institutions and number of branches, making it officially the nation with the most banks in the world.
Theories/Speculation
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The banking crisis was triggered by too much risk in the financial system. There are many types of risk associated with financial transactions for banks, like liquidity risk (the risk of a bank run because depositors try to withdraw too much money too quickly), credit risk (the risk that loans will go bad and no one will pay them back) and interest rate risk (the risk that the bank will have to pay more out for deposits than they are receiving by getting interest payments). When banking problems occur, it disrupts the loanable funds market and makes firms have to struggle to get capital for funding. The credit crisis was largely a crisis of bad loans; as banks overextended themselves and debtors failed to pay back the loans, banks couldn't cover their balance sheets and needed huge influxes of money to get back in the black.
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References
- Photo Credit Photo by Freeimages.co.uk; http://www.freeimageslive.com/galleries/workplace/financial/pics/03250003.jpg
