Commercial Bank
A commercial bank is a financial institution that accepts deposits from the public, makes loans to individuals and businesses, and provides core banking services, regulated at the federal and state level in the United States.
Commercial banks form the backbone of the U.S. financial system, channeling savings from depositors into productive loans for households, small businesses, and corporations. They accept checking and savings deposits, provide mortgages and auto loans to consumers, extend lines of credit and term loans to businesses, and offer a range of payment and cash management services. In exchange for this intermediation, they earn the spread between the interest rate they charge on loans and the rate they pay on deposits.
In the United States, commercial banks operate under a dual banking system, meaning they can be chartered either at the federal level — as national banks supervised by the Office of the Comptroller of the Currency (OCC) — or at the state level, supervised by state banking regulators and the Federal Deposit Insurance Corporation (FDIC). Banks that are members of the Federal Reserve System are also supervised by the Fed. This multilayered regulatory framework is unlike most other developed countries.
Deposit insurance is a foundational feature of the U.S. commercial banking system. The FDIC insures deposits up to $250,000 per depositor, per institution, per account ownership category, a limit established in response to the widespread bank failures of the Great Depression. This guarantee is designed to prevent bank runs — the panic-driven withdrawal of deposits that can destabilize even solvent institutions.
Commercial banks create money through the lending process. When a bank makes a loan, it credits the borrower's account with new funds while recording a corresponding liability, effectively expanding the money supply. This money creation power is one reason why banking regulation is treated as a public policy imperative — excessive lending can fuel asset bubbles and inflation, while bank failures can contract the money supply and deepen recessions.
The Federal Reserve's monetary policy is transmitted through commercial banks. When the Fed changes the federal funds rate, it affects the rate at which banks lend overnight reserves to each other, which in turn influences the rates banks charge on mortgages, business loans, and credit cards throughout the economy.