Role of Commercial Banks in Economy

Banks play an important part in a nation’s economy. Commercial banks are typically the intermediary between individual consumers and a nation’s central bank, which usually regulates the flow of money.

Services

Commercial banks offer several types of services to their customers, including deposit and checking accounts, personal and business loans and retirement accounts.

Types

Commercial banks are profit-type institutions run by a group of individuals or publicly held by several investor groups, such as Bank of America or Wells Fargo. These banks normally employ highly-educated executives to run their banking operations.

Functions

Commercial banks are primarily interested in lending funds to other banks and businesses and receiving a return on their investments through interest rates charged to these clients.

Benefits

Central banks use commercial banks to maintain the flow of money through a nation’s economic system and marketplace. As the central bank changes its monetary policy, commercial banks increase or decrease their lending policies as the middlemen of the banking industry.

Warning

The financial credit crisis that started in 2007 showed the high levels of risk taken on by commercial banks. Subprime mortgages, home equity lines of credit and other investments bought and sold between banks created an unsustainable financial bubble that eventually burst.

References

• Investorwords: Commercial Bank Definition
• SlideShare: Importance of Banks in an Economy