Commercial Bank Definition
United States banks are divided into two distinct types: Commercial banks and investment banks. The main difference between commercial banks and noncommercial banks is whether the banks take deposits from the public. After the passage of the Glass Steagall Act in 1933, commercial banks were prohibited from merging with insurance companies or investment banks. However, this was largely repealed IN 1999 by the Gramm Leach Bliley Act, and in the late 2000s many investment banks became bank holding companies.
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Functions of Commercial Banks
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The functions of commercial banks may be well-known to the average U.S. consumer. If they have a checking or savings account, it is probably at their local commercial bank. Commercial banks provide money orders and checks, lend money and provide mortgages, among other functions.
The Deposit-taking Function
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The deposit-taking function makes commercial banks especially relevant in the eyes of politicians. This is because the widespread loss of deposited money is a major concern for the economy. During the Great Depression there were many bank runs, and this contributed to the formation of the Federal Deposit Insurance Corporation (FDIC) and the passage of the Glass Steagall Act in 1933.
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Investment Banks
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Unlike commercial banks, investment banks do not take deposits from the public. Investment banks are banks that service governments and businesses and help them raise funds through activities such as issuing securities.
The Glass Steagall Act
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The Glass Steagall Act required that deposit taking and investment banking activities be kept separate to prevent major losses from risky investments from affecting deposits. However, in 1999 the United States Congress took steps to end this separation with the Gramm Leach Bliley Act.
The Federal Deposit Insurance Corporation
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Another government program that affects commercial banks is the FDIC. During the Great Depression many banks failed and the government decided to establish the FDIC to ensure that the public would not risk losing funds. The FDIC protects the funds in your checking or savings accounts up to at least $100,000.
Regulators of Commercial Banks
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A commercial bank is regulated by one of three different regulators: The Office of Thrift Supervision (OTS), The Federal Reserve (the Fed), and the Office of the Comptroller of the Currency (OCC). Commercial banks have the ability to pick their regulator. This unique feature has brought some criticism, as some argue that banks will be drawn to the most lax regulator.
Bank Holding Companies
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During the financial crisis of the late 2000s, some of the major investment banks converted themselves into bank holding companies. This allowed them to be regulated by the Federal Reserve and to have access to the discount window to keep them solvent. This alteration did much to eliminate the distinction that previously existed between commercial banks and investment banks.
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References
- Photo Credit bank image by Pefkos from Fotolia.com
