COMMERCIAL BANK

Commercial banks all operate under one principle, they attract funds by deposits, and they make loans. A bank operates as if it has two doors: money comes in one door-as deposit-and goes out the other door-as loan. The deposits represent the bank’s liabilities, the bank has to return this money later. The loans represent the bank’s assets, this money will be repaid to the bank.

Liabilities of commercial banks can be classified into three kinds:

I-    Deposit Liabilities:

    1- Transaction Account:

     Transaction Account is commonly called checking accounts, they are held by depositors so that they can transfer money by check.

     There are two kinds of transaction accounts. The first is demand deposits, which is a type of checking account mainly held by business firm, and on which no interest is paid.

     The second is other checkable deposits, which include other type of checking accounts mainly held by consumers, and on which interest is usually paid.

     2- Investment Account:

     Investment Account is also called non-transaction deposits, they are held by depositors to earn interest.

     There are also two kinds of investment accounts. The first is saving accounts, which are meant for small investors, the interest is usually quite low, but the money can generally be withdrawn whenever the depositors wish. The second is time deposits, which are meant for larger investors. The interest is relatively higher, but the money cannot be withdrawn until its specified maturity date.

II-   Non-Deposit Liabilities:

Although deposits are their main source of money, commercial bank also issues some instruments similar to deposits in most respects, non-deposits liabilities (security), to raise money.

III- Bank Capital:

Bank capital is also represented on the liability side of the bank balance sheet. Now commercial banks are owned by shareholders.

Each bank’s capital is equal to the sum of the amount invested by the original shareholding and the amounts that have been added or subtracted later, as the bank retained profits or suffered losses.

Assets of Commercial Banks:

The assets of commercial bank can be classified into four kinds:

     1- Cash Assets:

     Cash assets are held by bank as vault cash and as deposits at other banks. Commercial banks are required to keep a certain percentage of their deposits in vault cash or in a special account at their central banks-reserve requirements.

     Cash assets provide a bank with liquidity, which can be used when depositors wish to withdraw funds from the bank. Since transaction deposits are withdrawn with a much higher frequency than investment deposits, banks with a higher proportion of transaction deposits usually maintain a higher proportion of cash assets.

     2- Loans:

     Loans represent almost two-thirds of commercial bank assets. There are real estate mortgage, commercial and individual loans.

     Banks make large number of relatively small loans, the reason is that the bank cannot lend more than 15% of its capital to any single borrower.

     3- Other Assets:

     Other assets held by commercial banks include their offices and equipment and collateral that they receive from the bankrupt borrowers.

     4- Bank Security:

     Bank securities mainly consist of treasure securities and  municipal banks. Commercial banks are not allowed to hold corporate bonds or common stocks.

     Commercial banks benefit from holding treasure securities because they are highly liquid, and they also benefit from holding municipal bonds because their interest is exempt from federal or state taxation in the U.S. Central banks and local government may also require commercial banks to hold their security as lacking for government deposits.

  Main Services Provided by Commercial Banks:

     1- Inter-mediation Services:

Commercial banks provide inter-mediation services by attracting funds and by lending funds to other people whom need to borrow. Many people prefer to invest their money in bank deposits than in capital market security because bank deposits provide safety, convenience and special services. People also frequently prefer to use banks borrowing money.

Consequently, most people use the inter-mediation services of banks to deposit and borrow money.

2- Credit Cards:

Commercial banks also issue credit cards, which are a mean of payment just like currency and checks. A cardholder can purchase something by using these cards, so that they can build up credit on their account. All regular intervals, monthly, the bank sends the cardholder a statement of account with a request to repay any above amount by minimum required. This depends on the size of the balance outstanding. Rate of interest is over 2% per month on the amount outstanding.

3- Electronic Fund Transfer (EFT):

The EFT is recent development in which banks are trying to use computers and related electronic systems to replace the paper-based checking account and credit card systems. It is a low cost and fast speed alternative to the paper transfer system, there have been several important innovations such as automated teller machine (ATM).

Although banking regulations limit the range of services that commercial bank can provide, commercial banks have been engaged in more and more services, such as traveler’s check, money order certified check, safe deposit box… etc.

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