A commercial bank takes deposits, lends money, and moves it between accounts—that's the core business

A commercial bank is a for-profit institution that accepts deposits from individuals and businesses, then lends that money out to other borrowers. The difference between what they pay depositors in interest and what they charge borrowers is how they make money. They also move money between accounts, process checks, handle wire transfers, and provide other payment services. The bank itself doesn't create the money—it acts as an intermediary, holding your balance while using some of it to fund loans to others.

Commercial banks are different from investment banks, credit unions, and savings banks, though the lines have blurred since the 1990s. A commercial bank's primary job is lending and deposit-taking. They are regulated by the Federal Reserve, the FDIC (Federal Deposit Insurance Corporation), and state banking authorities. Your deposits up to $250,000 are insured by the FDIC, which means if the bank fails, you get your money back.

Key Takeaways

  • Commercial banks profit by borrowing from depositors at low interest rates and lending to borrowers at higher rates.
  • The FDIC insures deposits up to $250,000 per account holder per bank, protecting your balance if the bank fails.
  • Banks hold reserves—a percentage of deposits they cannot lend out—as required by federal regulation.
  • Most everyday banking services like checking accounts, debit cards, and bill pay happen through commercial banks.
  • Commercial banks are separate from investment banks, though large institutions often own both divisions.

How a commercial bank makes money from deposits and loans

When you deposit $1,000 into a checking account, the bank doesn't lock that money in a vault with your name on it. Instead, they add $1,000 to their pool of available funds. They might pay you 0.01% interest annually—about 10 cents per year. Meanwhile, they lend $800 of that $1,000 to a small business at 6% interest, earning $48 per year on that loan. The $200 they keep in reserve covers regulatory requirements and the risk that you might withdraw your money.

The bank's profit is the spread: they collect $48 from the borrower and pay you 10 cents, netting roughly $47.90 (minus operating costs). Multiply that across millions of accounts and thousands of loans, and the math explains why commercial banking is a large, stable business. Interest income is the largest source of revenue for most commercial banks, but they also charge fees for overdrafts, wire transfers, account maintenance, and other services.

Reserve requirements and why banks can't lend out all your money

The Federal Reserve sets a reserve requirement—the minimum percentage of deposits a bank must keep on hand and cannot lend out. As of 2023, this requirement is 0% for most deposit categories, a change from the historical 10% rule. However, banks still hold reserves voluntarily because they need cash to cover withdrawals, meet regulatory capital standards, and manage day-to-day operations.

This is why a bank run—when many depositors withdraw money at once—can threaten a bank's survival. If a bank has lent out 90% of deposits and suddenly 50% of depositors want their money back, the bank cannot meet those withdrawals when ready. They have to sell assets quickly, often at a loss, or borrow from other banks or the Federal Reserve's discount window. This is also why the FDIC exists: to prevent panic by guaranteeing deposits, so depositors don't all rush to withdraw at once.

The difference between commercial banks and other financial institutions

A credit union is member-owned and non-profit, so any earnings go back to members as lower fees or higher interest on savings. A savings bank or thrift historically focused on mortgage lending rather than commercial loans. An investment bank handles securities trading, underwriting stock offerings, and advising on mergers—they don't take deposits from the public. A brokerage buys and sells stocks and bonds on your behalf.

In practice, the boundaries blur. JPMorgan Chase, Bank of America, and Citigroup are all commercial banks that also own investment banking divisions. Wells Fargo and US Bank do commercial banking and some investment services. Credit unions now offer many of the same services as commercial banks—checking accounts, debit cards, wire transfers—but remain non-profit and member-owned. The key distinction is still the core business: commercial banks take deposits and make loans; investment banks trade securities and advise on corporate deals.

How deposits move through the banking system

When you write a check or send a wire transfer, your bank doesn't physically move cash. Instead, they send an electronic message to another bank, reducing your balance and increasing the recipient's balance. If both accounts are at the same bank, the transfer happens in minutes. If they are at different banks, the message goes through a clearing system like the Federal Reserve's FedWire or the Automated Clearing House (ACH).

ACH transfers—used for direct deposit, bill pay, and many online transfers—batch up thousands of transactions and settle them once or twice per day. That is why a direct deposit might take one business day and a bill payment might take two or three. Wire transfers through FedWire settle in real time during business hours, which is why they are faster and more expensive. Your bank is the intermediary; they deduct from your account and instruct the other bank to add to the recipient's account. The actual movement of money is a ledger entry, not physical currency.

Regulation and FDIC insurance protect depositors

Commercial banks are regulated by three main bodies: the Federal Reserve (which sets monetary policy and oversees large banks), the FDIC (which insures deposits and examines banks), and the Office of the Comptroller of the Currency (which charters and supervises national banks). State banking authorities regulate state-chartered banks. These agencies conduct regular audits, set capital requirements, and can shut down a bank if it becomes insolvent.

The FDIC insurance limit is $250,000 per depositor per bank per account category. This means if you have $300,000 in a checking account at Bank A, only $250,000 is insured. The remaining $100,000 is at risk if the bank fails. However, if you have $250,000 in a checking account and $250,000 in a savings account at the same bank, both are fully insured because they are in different account categories. Joint accounts are insured separately, so a joint account with your spouse gets its own $250,000 coverage.

What commercial banks do and don't do

Commercial banks handle payment processing, lending, deposit-taking, and basic financial services. They issue debit cards, process checks, send wire transfers, and offer overdraft protection. They do not typically manage investment portfolios, trade stocks, or underwrite securities offerings—those are investment banking functions. Some large commercial banks own subsidiaries that do these things, but the commercial bank division itself stays focused on deposits and loans.

Banks also do not set interest rates on their own. The Federal Reserve sets the federal funds rate, which is the rate banks charge each other for overnight loans. Commercial banks use this as a benchmark and adjust their own rates based on competition, their cost of funds, and the risk profile of the borrower. A mortgage rate, a car loan rate, and a savings account rate all move in response to Fed policy, but they are not set by the Fed directly.

Frequently Asked Questions

Is my money safe in a commercial bank?

Your deposits up to $250,000 are insured by the FDIC, so if the bank fails, you get your money back. The FDIC has a fund backed by bank premiums and the U.S. government. Since the FDIC was created in 1933, no depositor has lost FDIC-insured funds due to bank failure. Amounts above $250,000 are not insured and are at risk if the bank becomes insolvent.

Why do banks charge fees if they make money from interest?

Interest income covers the cost of lending and operations, but banks also charge fees for services that don't generate interest income—overdraft protection, wire transfers, account maintenance, and ATM usage. Fees are also a way to discourage certain behaviors, like overdrafting, and to offset the cost of serving low-balance accounts. Banks with higher deposit balances often waive fees.

Can a commercial bank refuse to give me my money?

A bank can place a hold on deposits for a few business days while they verify funds, and they can freeze an account if they suspect fraud or if you are subject to a court order. They cannot straightforward refuse to return your money without legal cause. If a bank fails, the FDIC takes over and returns insured deposits. If you believe a bank is wrongfully holding your money, you can file a complaint with the FDIC or your state banking authority.

What happens to my money when a bank fails?

The FDIC steps in, takes control of the bank's assets, and pays out insured deposits (up to $250,000 per account) from the FDIC insurance fund. This usually happens within a few business days. Uninsured deposits and creditors are paid from the sale of the bank's assets, but often receive less than 100 cents on the dollar. The FDIC may also arrange for another bank to acquire the failed bank and assume its deposits.

How is a commercial bank different from a credit union?

A commercial bank is for-profit and owned by shareholders; a credit union is non-profit and owned by members. Credit unions typically offer lower fees and higher savings rates because they don't need to generate profit for shareholders. Both are insured (credit unions by the NCUA, not the FDIC), and both offer similar services. Credit unions are often smaller and may have membership requirements, while commercial banks are open to anyone.