COMMERCIAL BANKING

AND
NON BANKING FINANCIAL
INSTITUTIONS
What Is a Commercial Bank?
• The term commercial bank refers to a financial institution that
accepts deposits, offers checking account services, makes
various loans, and offers basic financial products like
certificates of deposit (CDs) and savings accounts to
individuals and small businesses. A commercial bank is where
most people do their banking.

• Commercial banks make money by providing and earning

interest from loans such as mortgages, auto loans, business
loans, and personal loans. Customer deposits provide banks
with the capital to make these loans.
Key takeaways
• Commercial banks offer consumers and small to mid-
sized businesses with basic banking services including
deposit accounts and loans.
• Commercial banks make money from a variety of fees
and by earning interest income from loans.
• Commercial banks have traditionally been located in
physical locations, but a growing number now operate
exclusively online.
• Commercial banks are important to the economy
because they create capital, credit, and liquidity in the
market.
How Commercial Banks Work

• Commercial banks provide basic banking services and products

to the general public, both individual consumers and small to
mid-sized businesses. These services include checking and
savings accounts, loans and mortgages, basic investment
services such as CDs, as well as other services such as safe
deposit boxes.
• Banks make money from service charges and fees. These fees
vary based on the products, ranging from account fees
(monthly maintenance charges, minimum balance fees,
overdraft fees, non-sufficient funds (NSF) charges), safe deposit
box fees, and late fees. Many loan products also contain fees in
addition to interest charges.
• Banks also earn money from interest they earn by lending out
money to other clients. The funds they lend comes from customer
deposits. However, the interest rate paid by the bank on the money
they borrow is less than the rate charged on the money they lend.
For instance, a bank may offer savings account customers an annual
interest rate of 0.25%, while charging mortgage clients 4.75% in
interest annually.
• Commercial banks have traditionally been located in buildings where
customers come to use teller window services and automated teller
machines (ATMs) to do their routine banking. With the rise in
internet technology, most banks now allow their customers to do
most of the same services online that they could do in person
including transfers, deposits, and bill payments.
• IMPORTANT A growing number of commercial banks operate
exclusively online, where all transactions with the commercial bank
must be made electronically. Because these banks don't have any
brick-and-mortar locations, they can offer a wider range of products
and services at a lower cost—or none at all—to their customers.
Significance of Commercial
Banks
• Commercial banks are an important part of the economy. Not
only do they provide consumers with an essential service, but
they also help create capital and liquidity in the market.

• They ensure liquidity by taking the funds that their customers

deposit in their accounts and lending them out to others.
Commercial banks play a role in the creation of credit, which
leads to an increase in production, employment, and
consumer spending, thereby boosting the economy.

• As such, commercial banks are heavily regulated by a central

bank in their country or region. For instance, central banks
impose reserve requirements on commercial banks. This
means banks are required to hold a certain percentage of their
consumer deposits at the central bank as a cushion if there's a
rush to withdraw funds by the general public.
Special Considerations
• Customers find commercial bank investments, such as savings
accounts and CDs, attractive because they are insured by the
Federal Deposit Insurance Corporation (FDIC), and money can be
easily withdrawn. Customers have the option to withdraw money
upon demand and the balances are fully insured up to $250,000.
Therefore, banks do not have to pay much for this money.

• Many banks pay no interest at all on checking account balances

(or at least pay very little) and offer interest rates for savings
accounts that are well below U.S. Treasury bond (T-bond) rates.

• Consumer lending makes up the bulk of North American bank

lending, and of this, residential mortgages make up by far the
largest share. Mortgages are used to buy properties and the
homes themselves are often the security that collateralizes the
loan.
• .
Commercial Banks vs. Investment
Banks
• Both commercial and investment banks provide important services
and play key roles in the economy. For much of the 20th century,
these two branches of the banking industry were generally kept
separate from one another in the U.S., thanks to the Glass-Steagall
Act of 1933, which was passed during the Great Depression.

• It was largely repealed by the Gramm-Leach-Bliley Act of 1999,

allowing for the creation of financial holding companies that could
have both commercial and investment bank subsidiaries.

• While it tore down the commercial and investment bank wall, the
Gramm-Leach-Bliley Act did maintain some safeguards: It forbids a
bank and a nonbank subsidiary of the same holding company from
marketing the products or services of the other entity—to prevent
banks from promoting securities underwritten by other subsidiaries
to their customers—and placed size limitations on subsidiaries.
• While commercial banks have traditionally provided services
to individuals and businesses, investment banking offers
banking services to large companies and institutional
investors. They act as financial intermediaries, providing their
clients with underwriting services, merger and acquisition
(M&A) strategies, corporate reorganization services, and other
types of brokerage services for institutional and high-net-
worth individuals (HNWIs).

• While commercial banking clients include individual

consumers and small businesses, investment banking clients
include governments, hedge funds, other financial institutions,
pension funds, and large companies.
Examples of Commercial Banks
• Some of the world's largest financial institutions are
commercial banks or having commercial banking
operations—many of which can be found in the United
States. For instance, Chase Bank is the commercial
banking unit of JPMorgan Chase. Headquartered in New
York City, Chase Bank reported about $3.2 trillion in
assets as of June 2021.

• Bank of America is the second-largest bank in the United

States, with more than $2.35 trillion in assets and 66
million customers including both retail clients and small
and mid-sized businesses
Non-bank financial institution
• A non-banking financial institution (NBFI) or non-bank financial
company (NBFC) is a financial institution that does not have a full
banking license or is not supervised by a national or international
banking regulatory agency.
• NBFC facilitate bank-related financial services, such as investment,
risk pooling, contractual savings, and market brokering.
• Examples of these include insurance firms, pawn shops, cashier's
check issuers, check cashing locations, payday lending, currency
exchanges, and microloan organizations.
• Alan Greenspan has identified the role of NBFIs in strengthening an
economy, as they provide "multiple alternatives to transform an
economy's savings into capital investment which act as backup
facilities should the primary form of intermediation fail.
Key takeaways

• Nonbank financial companies (NBFCs), also known as nonbank

financial institutions (NBFIs) are entities that provide certain
bank-like financial services but do not hold a banking license.
• NBFCs are not subject to the banking regulations and oversight
by federal and state authorities adhered to by traditional banks.
• Investment banks, mortgage lenders, money market funds,
insurance companies, hedge funds, private equity funds, and P2P
lenders are all examples of NBFCs.
• Since the Great Recession, NBFCs have proliferated in number
and type, playing a key role in meeting the credit demand unmet
by traditional banks.
The role of Non-Bank Financial Institutions in the
wider industry

• For most people, the bank is the first port of call when seeking
out financial aid or advice. However, many people also find that
the services offered by the bank don’t adequately meet their
requirements, leaving them at a loss for what to do next.
• While banks tend to offer a set of financial services as part of a
clear packaged deal, NBFIs unbundle these offers and tailor their
services to meet the needs of the specific client. Therefore, many
people who can’t find help at the bank can find it with an NBFI.
• The role of NBFIs is generally to allocate surplus resources to
individuals and companies with financial deficits, allowing them
to supplement banks. By unbundling financial services, targeting
them and specializing in the needs of the individual, NBFIs work
to enhance competition in the financial sector.
NBFIs offer most kinds of banking
services, often including:
 Loans
 Credit facilities
 Retirement planning
 Education funding
 Underwriting stocks and shares
 Money market trading
 TFCs (Term Finance Certificates)
 Wealth management
 Portfolio of stocks and shares management
 Discounting services
Risk Pooling Institutions
These are organizations such as insurance companies
which underwrite economic risks associated with a series
of factors, including illness, death, damage and risk of
loss. In return for collecting an insurance premium, these
organisations provide a promise of economic protection
in case of loss.

There are two key kinds of insurance companies: general

insurance and life insurance. The former tends to be a
short term agreement, while life insurance can be agreed
on a much longer term basis.
Institutional Investors
• This category refers to organizations such as
pension funds and mutual funds. These are the
institutions which trade securities in volumes
that qualify for lower commissions.

• These are also known as contractual savings

institutions. Mutual funds can be either open
ended or closed ended.
Other Non-Bank Financial
Institutions
These are other forms of NBFI which provide financial
services such as the leasing of assets, company
management, financial advice, security brokering and
market makers, who provided liquidity.

It may also refer to specialized sectorial financiers who

provide a limited range of services to a targeted sector,
such as real estate financers or payday lending
companies.
THANK YOU