What Is the Role of Commercial Banks?

Commercial banks are financial institutions that provide finance and investing services for businesses. The primary role of commercial banks in the developed world is to offer business bank accounts with standard options, such as deposits, withdrawals and loans. A secondary role of commercial banks is supporting the development of the local economy.

Collectively, commercial banks act as a storehouse of the country or region’s wealth. The banks take care of funds that were deposited by clients into their business bank accounts. The banks invest the money to generate interest for their clients and to maximize the bank’s profits. They use the profits to provide financial resources for clients, to help businesses that benefit the community and, in some cases, to fund social responsibility programs.

Investing in new businesses is a major aspect of commercial banking. Acting as lenders, the banks offer start-up loans and financing for capital equipment purchases. They promote trade and industry through credit card processing, international banking services and foreign currency exchange for export and import companies. In addition, most financial institutions offer their clients business advice, act as an intermediary for the purchase of insurance coverage and take an active interest in the financial affairs and management of the company.

New businesses struggle to get started without available credit, and retail or personal banks might be reluctant to fund business ventures without some form of collateral. The role of commercial banks in these situations is to provide credit facilities that are customized to the needs of the clients. This can help new ventures to purchase inventory or outfit their premises.

The larger the commercial bank, the greater the role it plays in the economy. When a very large bank fails, the ripple effect that it can have on the local or national economy can be staggering. Businesses that have deposited funds into a bank that collapses can be wiped out in many cases. In spite of strict government regulation on how banks can use assets, the government might be unable to predict or prevent the losses incurred by these banks. Most countries have regulatory bodies to manage the role of commercial banks, to oversee their activities and to provide recourse for business clients if they are dissatisfied.