Definition of Commercial Bank

A commercial bank is one which operates the more traditional model of banking. Some of the roles of a commercial bank are:

• Provide a savings account for customers to safely store their money
• Offering loans to customers (mortgages etc.) and business
• Providing lines of liquidity via credit cards

Commercial banking runs on a very simple model; pay depositors a low interest rate, charge a higher interest rate to borrowers, profit the difference. As such, commercial banking is quite low risk (until there is a lack of confidence). Problems arise when a financial institution runs both an investment bank and a commercial bank, thereby exposing consumer deposits to the risks associated with the investment bank.

Another issue is that almost all modern commercial banks run a fractional banking system, which makes them very susceptible to sudden changes in the deposit base they hold. A quick withdrawal of lots of consumer deposits can cause a bank run.