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Commercial banks are for-profit financial institutions that accept deposits from individuals and businesses, make loans, and offer a range of financial services including checking accounts, savings accounts, certificates of deposit, and credit products. They are the most common type of bank and the primary intermediary between savers who deposit money and borrowers who need capital. JPMorgan Chase, Bank of America, Wells Fargo, and Citibank are among the largest commercial banks in the United States.
Commercial banks operate under charters issued by either the federal government or a state government, and they are regulated by the Federal Reserve, the Office of the Comptroller of the Currency (OCC), or state banking regulators depending on their charter type.
Commercial banks do more than hold deposits. Their business model is built on the spread between the interest they earn on loans and the interest they pay on deposits.
Commercial banks operate under a fractional reserve system. Think of it like a revolving door: money deposited by one customer flows back out as a loan to another, and that borrower spends it in ways that eventually return as deposits somewhere else.
When you deposit $10,000 in a bank, the bank keeps a fraction as reserves and lends out the rest. The borrower spends the loan proceeds, and the recipient of those funds deposits them at their bank. This cycle multiplies the original deposit into a larger total amount of money in circulation, a process known as the money multiplier.
Commercial banks vary significantly in size and focus.
| Community Banks | Regional Banks | Large National Banks | |
|---|---|---|---|
| Asset Size | Under $1 billion | $1 billion to $100 billion | Over $100 billion |
| Geographic Reach | Local; one or a few counties | State or multi-state | National and international |
| Primary Clients | Local individuals and small businesses | Mid-sized businesses and consumers | Corporations, governments, consumers |
| Regulatory Oversight | State regulators or OCC | Fed, OCC, or state regulators | Federal Reserve, OCC |
| Systemic Risk Designation | No | Possible for largest regional banks | Yes; designated as systemically important |
U.S. commercial banks face a multi-layered regulatory framework designed to protect depositors and maintain financial system stability.
The Federal Deposit Insurance Corporation insures deposits up to $250,000 per depositor, per institution, per account category. This guarantee prevents bank runs by assuring depositors their money is safe even if the bank fails. The Federal Deposit Insurance Corporation was created in 1933 following the wave of bank failures during the Great Depression.
The Federal Reserve establishes the regulatory framework for bank holding companies and sets capital requirements that determine how much equity banks must hold relative to their risk-weighted assets. After the 2008 financial crisis, the Dodd-Frank Act imposed stricter capital and liquidity requirements on banks with assets above $10 billion.
The Federal Reserve annually stress tests large banks to evaluate whether they can survive severe economic downturns. Banks that fail the stress test are restricted from paying dividends or buying back stock until they improve their capital position.
Commercial banks and investment banks serve fundamentally different functions. Commercial banks take deposits and make loans. Investment banks underwrite securities, advise on mergers and acquisitions, and facilitate capital markets transactions. The Glass-Steagall Act of 1933 separated these two functions until its repeal in 1999. Since then, large bank holding companies like JPMorgan Chase operate both commercial and investment banking divisions under one corporate parent.
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