What Are Basic Functions Performed by Commercial Banks?
Commercial banks have been a main function of economic markets for hundreds of years. While certain functions have changed to meet the needs of consumers and businesses, overall the main services offered by banks have remained the same. Banks help facilitate the movement of money in the economic market, transferring funds from savers to spenders for the purpose of earning interest.
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Customer Deposits
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Collecting and holding customer deposits are the primary bank service offered to individual consumers. Banks will hold money saved by consumers, who may wish to withdraw this money and spend it at a later time. While holding this money, banks will lend the money to other individuals and businesses that are currently looking to make major investments. The Federal Reserve requires commercial banks to hold a certain amount of money in their coffers; any funds more than this amount are able to be lent based on the bank's standards.
Individual Lending
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Lending money to individuals is a major portion of a bank's business. Most banks have a pre-determined budget portfolio that allows bank management to lend money. A banks portfolio will have several types of loan categories, such as vehicle loans, home mortgages, personal loans and personal credit cards. These categories have maximum lending amounts banks can offer to consumers; these limits ensure that the lending portfolios do not become too one-sided and exposed to individual loan default risk.
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Business Lending
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Business banking usually has different rules for banking and lending because businesses have more money flow through the banking system. Different lending portfolios may be used in the bank since businesses require higher loan amounts for their business operations. Business lending portfolios often include a segment for credit lines, which are short-term loans with high interest rates used by businesses for daily operations. Commercial banks may also offer credit cards for business use as part of their lending portfolio.
Collect Capital
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Banks charge fees and interest to consumers and businesses for the use of the bank services. Bank fees are often associated with bank account rules violations or filing loan paperwork with local governments. Interest is charged loans and credit cards as a "fee" for using the bank's money. This money collected by the bank serves two purposes: pay for the operating expenses of the bank and increase the lending portfolio of the bank. Some banks also pay individual and business bank accounts a small amount of interest. This interest is paid from the capital collected by the bank.
Transfer Funds
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As the global marketplace has gotten smaller through the use of technology, banks have aided individuals and businesses through the electronic transferring of money. Electronic money transfers allow bank customers to move money worldwide to family, friends or business partners. Money transfers can be processed through different bank companies and branches, increasing the movement of capital in the global economic market.
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