Background
A commercial bank is a financial institution that offers a wide range of services to the general public, including accepting deposits and making loans. They cater primarily to individuals and small businesses, performing crucial roles in the economic ecosystem by providing liquidity, facilitating transactions, and supporting economic growth.
Historical Context
The concept of commercial banks dates back to Renaissance Italy, where the first modern banking practices were developed. Over the centuries, commercial banking evolved, establishing itself as a cornerstone in the economic infrastructure of any advanced society. In the UK, these institutions are often termed “retail” or “high street” banks, emphasizing their accessibility and focus on day-to-day financial services for households and small- to medium-sized enterprises (SMEs).
Definitions and Concepts
Commercial banks accept deposits from the public and extend loans to a wide array of clients, including households and small firms. Beyond straightforward deposit and loan services, they offer a plethora of additional services such as:
- Cash and credit card services
- Storage facilities for valuables and documents
- Foreign exchange services
- Stockbroking
- Mortgage finance
- Executor services
Major Analytical Frameworks
Classical Economics
Commercial banks in Classical Economics are viewed as intermediaries facilitating capital movement, enabling savings to be transformed into investment.
Neoclassical Economics
In Neoclassical frameworks, commercial banks are deemed efficient market players responding to supply and demand for financial services, optimizing resource allocation.
Keynesian Economics
Keynesian theory accentuates commercial banks’ role in influencing economic stability and growth via their lending activities, which can spur consumption and investment.
Marxian Economics
From a Marxian viewpoint, commercial banks are instruments of capital concentration, reinforcing the power dynamics in a capitalist society.
Institutional Economics
Institutional Economics examines commercial banks in the context of regulatory environments and the institutional frameworks within which they operate.
Behavioral Economics
Behavioral Economics looks at how consumer behaviors and biases affect their interactions with commercial banks and the subsequent outcomes for personal finance and economic stability.
Post-Keynesian Economics
This approach emphasizes the endogenous nature of money, suggesting that commercial banks play a critical role in money creation through lending.
Austrian Economics
Austrian Economics focuses on the importance of individual decision-making processes and the role of commercial banks in facilitating voluntary exchanges which could organically stabilize the economy without heavy regulatory intervention.
Development Economics
Development Economics considers commercial banks as vital in mobilizing savings and allocating credit which can lead to development projects, thereby facilitating economic progress in developing nations.
Monetarism
Monetarists see commercial banks as instrumental in controlling the money supply, crucial for managing inflation and economic cycles.
Comparative Analysis
Commercial banks distinguish themselves from other financial institutions by their comprehensive range of services that cater not only to individual consumers but also small businesses. While investment banks primarily handle more complex financial activities and cater to larger clients, commercial banks are integral to everyday economic activities and grassroots lending.
Case Studies
Case studies can be examined to illustrate the functions and significance of commercial banks. Notable examples include:
- The role of commercial banks during the 2008 Global Financial Crisis
- The influence of commercial bank lending on small business growth in emerging markets
- The transition of traditional banks to include fintech solutions in their service offering
Suggested Books for Further Studies
- “Commercial Banking: The Management of Risk” by Benton E. Gup and James W. Kolari
- “Banking and Financial Services” by Benton E. Gup
- “Modern Banking” by Shelagh Heffernan
Related Terms with Definitions
- Investment Bank: Financial institutions that primarily offer services such as underwriting, acting as intermediaries between an issuer and the public, and facilitating mergers and acquisitions.
- Credit Union: A member-owned financial cooperative providing credit and other financial services to its members.
- Savings and Loan Association: A financial institution that specializes in accepting savings deposits and making mortgage loans.
- Central Bank: The principal monetary authority of a nation, responsible for supply of money and regulation of the banking system.
