A commercial bank takes deposits from people and businesses, then lends that money out to earn interest

A commercial bank is a for-profit business that accepts deposits (money you put in), holds it in accounts, and lends it to borrowers who pay interest on the loan. The difference between what the bank pays you in interest on your deposit and what it charges borrowers in interest on loans is how the bank makes money. Commercial banks are the everyday banks most people use — Chase, Bank of America, Wells Fargo, your local credit union — not investment banks or central banks.

The key word is commercial: these banks exist to do business with the public and with companies. They are not the Federal Reserve (which manages the money supply for the whole country) and they are not investment banks (which trade stocks and bonds). A commercial bank's job is to move money between savers and borrowers, and to provide the services that make that movement possible.

Key Takeaways

  • Commercial banks accept deposits in checking and savings accounts, then lend that money to borrowers and keep the interest spread as profit.
  • The Federal Deposit Insurance Corporation (FDIC) insures deposits up to $250,000 per account holder per bank, so your money is protected if the bank fails.
  • Commercial banks offer checking accounts, savings accounts, credit cards, mortgages, auto loans, and business loans as their main services.
  • Banks are regulated by federal and state authorities to ensure they hold enough capital, manage risk responsibly, and do not engage in fraud.

How a commercial bank makes money from deposits and loans

When you deposit money into a checking or savings account, the bank does not lock your money in a vault. Instead, the bank uses your deposit to lend to other customers — a homebuyer getting a mortgage, a business buying equipment, a person paying off credit card debt. The borrower pays interest on that loan. The bank pays you a small amount of interest on your deposit (often close to zero in recent years). The bank keeps the difference.

For example, if a bank pays you 0.01% interest on a savings account and lends that same money to a homebuyer at 6.5% interest, the bank earns 6.49% on the spread. Multiply that across millions of deposits and thousands of loans, and the spread becomes the bank's main source of profit. This is why banks want deposits — deposits are the raw material they use to make loans.

Banks also earn money from fees: monthly account maintenance fees, overdraft fees, wire transfer fees, ATM fees charged to non-customers. Some banks earn significant income from credit card interchange fees (a small percentage of every card transaction). Investment advisory services and wealth management for high-net-worth customers also generate fees.

The main services commercial banks provide

Deposit accounts are the foundation. Checking accounts let you write checks and use a debit card. Savings accounts earn interest (though usually very little) and limit how many withdrawals you can make per month. Money market accounts are a hybrid — they earn more interest than savings but require a higher minimum balance.

Lending products are where banks deploy the deposits they hold. Mortgages let people buy homes. Auto loans finance car purchases. Personal loans cover medical bills, home repairs, or debt consolidation. Business loans help companies buy inventory, equipment, or real estate. Credit cards are a form of short-term revolving credit — you borrow up to a limit, pay interest on what you use, and can borrow again as you pay it down.

Payment services move money between accounts and between banks. Wire transfers send money electronically. Automated Clearing House (ACH) transfers move money between bank accounts (usually slower and cheaper than wire). Debit cards let you spend directly from your account. Bill pay lets you schedule payments to creditors or service providers.

Many commercial banks also offer investment services — brokerage accounts, mutual funds, retirement accounts — though these are often run as a separate division and are not insured by the FDIC the way deposits are.

How the FDIC protects your deposits

The Federal Deposit Insurance Corporation (FDIC) is a government agency that insures deposits at member banks. If a bank fails, the FDIC pays depositors up to $250,000 per depositor per bank. This means if you have $100,000 in a checking account and $100,000 in a savings account at the same bank, both are covered — you have $200,000 in coverage at that one bank.

The $250,000 limit applies per depositor per bank, not per account. If you have $300,000 at Bank A, only $250,000 is covered and you lose $50,000. If you have $300,000 split between Bank A and Bank B, both banks' deposits are fully covered because the limit resets at each bank.

Joint accounts (accounts held in two names) are insured separately, so a joint account with $250,000 is covered in full, and each account holder's individual accounts at the same bank are also covered up to $250,000 each. Retirement accounts (IRAs, 401(k)s held at a bank) are insured separately as well, up to $250,000.

Not all banks are FDIC members, though most are. Credit unions are insured by the National Credit Union Administration (NCUA), which works the same way. Before opening an account, you can check whether a bank is FDIC-insured by searching the FDIC's BankFind tool on their website.

Who regulates commercial banks and why

Commercial banks are regulated by multiple authorities to prevent fraud, ensure they have enough capital to absorb losses, and protect depositors. The Office of the Comptroller of the Currency (OCC) regulates national banks (banks with "National" in the name). The Federal Reserve regulates bank holding companies and state-chartered banks that are members of the Federal Reserve System. State banking regulators oversee state-chartered banks that are not Federal Reserve members.

Regulators require banks to hold a minimum amount of capital (money the bank owns, not money deposited by customers) relative to the loans and risky assets they hold. This is called a capital requirement. If a bank makes too many bad loans, it can run out of capital and fail. Capital requirements force banks to be conservative enough that they can survive losses.

Regulators also conduct examinations — audits of the bank's books, lending practices, and risk management. Banks must report their financial condition regularly. If a regulator finds serious problems, it can force the bank to stop certain activities, raise more capital, or in extreme cases, shut down the bank before it fails and harms depositors.

The difference between commercial banks and other financial institutions

A credit union is similar to a commercial bank but is organized as a non-profit owned by its members (depositors). Credit unions often offer lower fees and better interest rates on deposits, but they are smaller and may have fewer branches. Credit unions are insured by the NCUA, not the FDIC, but the coverage is the same: $250,000 per member per credit union.

An investment bank does not take deposits from the public. Instead, it trades securities (stocks and bonds), helps companies raise money by issuing stock or bonds, and advises on mergers and acquisitions. Investment banks earn money from trading commissions and advisory fees, not from the deposit-to-loan spread. Some large financial institutions (like JPMorgan Chase) have both a commercial bank division and an investment bank division.

A savings bank or thrift is a commercial bank that historically focused on mortgages and savings accounts rather than business lending. The line between savings banks and commercial banks has blurred over time, and most savings banks now offer the full range of commercial banking services.

A central bank (like the Federal Reserve in the United States) does not take deposits from the public or make loans to individuals. Instead, it manages the money supply, sets interest rates, and regulates other banks. The Federal Reserve is a bank for banks and the government, not a bank for people.

Why commercial banks matter to the broader economy

Commercial banks are the plumbing of the economy. Without them, savers would have nowhere to put money and borrowers would have no way to get loans. A person who wants to buy a house needs a mortgage, which comes from a bank. A small business that wants to expand needs a loan, which comes from a bank. A company that wants to make payroll needs to move money quickly, which happens through the bank's payment systems.

When banks fail or stop lending, the economy suffers. During the 2008 financial crisis, many banks had made too many bad mortgages and ran out of capital. Banks stopped lending to each other and to businesses. Businesses could not get loans to operate, so they laid off workers. The economy contracted sharply. This is why regulators watch banks so carefully — a banking crisis can become an economic crisis.

Banks also affect interest rates. When the Federal Reserve raises or lowers its benchmark interest rate, commercial banks adjust the rates they offer on deposits and charge on loans. This ripples through the economy: higher rates make borrowing more expensive and saving more rewarding, which slows spending and inflation. Lower rates do the opposite. Banks are the mechanism through which the Federal Reserve's decisions reach households and businesses.

Frequently Asked Questions

What happens to my money if a commercial bank fails?

The FDIC takes over the bank and pays you up to $250,000 per account category (checking, savings, money market, retirement, joint, etc.) at that bank. If you have more than $250,000 in one category, the amount over $250,000 is at risk. Most depositors are fully covered because their balances are below the limit.

Why do banks pay almost no interest on savings accounts?

Banks pay interest based on what the Federal Reserve's benchmark rate is. When the Fed rate is near zero (as it was from 2008 to 2015 and again from 2020 to 2022), banks have no reason to pay much interest on deposits because they can lend money out at low rates too. When the Fed raises rates, savings account interest usually rises as well, though it lags behind.

Can a commercial bank refuse to open an account for me?

Yes. Banks can refuse service to anyone, though they cannot discriminate based on race, religion, national origin, or other protected categories. Banks often refuse accounts to people with a history of fraud, unpaid overdrafts at other banks, or involvement in illegal activity. Some banks also use ChexSystems, a reporting system that tracks banking problems.

Is my money safer at a big bank or a small bank?

FDIC insurance protects deposits equally at any FDIC-insured bank, so safety is the same up to $250,000. Large banks are regulated more heavily and have more resources to manage risk, but they also take bigger risks. Small banks are often more conservative. The key is that your bank is FDIC-insured, not its size.

What is the difference between a bank and a credit union?

Credit unions are non-profit and owned by members; commercial banks are for-profit and owned by shareholders. Credit unions often have lower fees and better rates, but fewer branches and services. Both are insured up to $250,000 per member per institution. Credit unions typically serve a specific group (employees of a company, members of a profession, people in a geographic area).