A commercial bank is a licensed financial institution that accepts deposits from households and businesses, makes loans, and provides payment services such as current accounts, cards and transfers. It earns most of its income from the difference between the interest it charges borrowers and the interest it pays depositors, plus fees. Commercial banks are the main channel through which central-bank decisions on interest rates reach the wider economy.
The term separates deposit-taking, lending banks from an investment bank, which mainly underwrites and trades securities. In everyday use it covers both high-street retail banks and banks that serve companies. Some countries use other labels: the UK speaks of clearing banks, Pakistan of scheduled banks, and many emerging markets distinguish commercial banks from specialized and Islamic banks.
Commercial banks in plain terms
A commercial bank works a bit like a library that lends out more than the books on its shelves at any one moment. Most borrowers bring their books back on time, and most readers only want a few books at once, so the library can keep lending as long as it manages returns carefully and keeps enough in stock.
Savers leave money in the bank and expect to take it out whenever they like. The bank keeps part of it ready, lends most of the rest to people buying homes or running businesses, and charges them more than it pays savers. The trick, and the risk, is that savers can ask for their money back faster than loans are repaid.
How a commercial bank makes money
A commercial bank's balance sheet is mostly loans and securities on the asset side, funded by deposits and a smaller layer of shareholders' capital. The key earnings measure is net interest margin, the interest earned minus interest paid, relative to earning assets. Fee income from accounts, cards, foreign exchange and trade finance adds to that. Main costs are staff, branches and technology, and losses on loans that are not repaid.
Banks also transform maturities: they fund long loans, such as a 25-year mortgage, with deposits that can leave at once. This is useful for the economy but exposes the bank to liquidity risk and interest rate risk.
How bank lending creates money
Most money in a modern economy is commercial bank money, the balances in bank accounts. The Bank of England explained in 2014 that when a bank makes a loan it simultaneously creates a matching deposit in the borrower's account, so lending creates new money rather than only passing on existing savings. Banks' ability to do this is limited by profitable demand for loans, capital rules, the need to settle payments with other banks in central bank money, and the policy rate set by the central bank. Textbooks that describe a fixed "money multiplier" based on the reserve requirement are now seen as a simplification; the Federal Reserve cut US reserve requirements to zero in March 2020. Changes in bank lending are a major driver of the money supply, and a sharp fall can become a credit crunch.
Regulation and safety nets
Because banks hold the public's money and run the payment system, they are among the most regulated businesses. A bank needs a licence or charter, must meet capital and liquidity rules based on the Basel framework, currently Basel III, and is supervised by the central bank or a separate authority. In return, banks usually have access to central-bank lending, including help from the central bank as lender of last resort in a crisis.
Deposit insurance protects small savers and reduces the incentive to run. As of late 2026 the US Federal Deposit Insurance Corporation covers $250,000 per depositor, per insured bank, per ownership category; the UK Financial Services Compensation Scheme raised its limit from £85,000 to £120,000 on 1 December 2025; and EU schemes cover €100,000.
Risks, failures and competition
A loss of confidence can trigger a bank run. Modern runs can be very fast: in March 2023 Silicon Valley Bank lost about $42 billion of deposits in a single day before regulators closed it. Critics argue that implicit government support for large banks encourages risk-taking, a form of moral hazard, while supporters of current rules say higher capital has made the system safer than before 2008.
Commercial banks also face competition from neobanks, payment firms and shadow banking lenders, part of a broader trend called disintermediation. Some governments own commercial banks outright, a legacy of past nationalization, as in India, where the State Bank of India and other public-sector banks hold a large share of deposits.