Commercial banks
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commercial bank for businesses
Commercial banks are so named because they specialize in loans to commercial and industrial businesses. Commercial banks are owned by private investors, called stockholders, or by companies called bank holding companies. The vast majority of commercial banks are owned by bank holding companies. (A holding company is a corporation that exists only to hold shares in another company.) In 1984, 62 percent of banks were owned by holding companies. In 2000, 76 percent of banks were owned by holding companies. The bank holding company form of ownership became increasingly attractive for several reasons. First, holding companies could engage in activities not permitted in the bank itself—for example, offering investment advice, underwriting securities, and engaging in other investment banking activities. But these activities were permitted in the bank if the holding company owned separate companies that offer these services. Using the holding company form of organization, bankers could then diversify their product lines and offer services requested by their customers and provided by their European counterparts. Second, many states had laws that restricted a bank from opening branches to within a certain number of miles from the bank’s main branch. By setting up a holding company, a banking firm could locate new banks around the state and therefore put branches in locations not previously available.
Commercial banks are “for profit” organizations. Their objective is to make a profit. The profits either can be paid out to bank stockholders or to the holding company in the form of dividends, or the profits can be retained to build capital (net worth). Commercial banks traditionally have the broadest variety of assets and liabilities. Their historical specialties have been commercial lending to businesses on the asset side and checking accounts for businesses and individuals on the liability side. However, commercial banks also make consumer loans for automobiles and other consumer goods as well as real estate (mortgage) loans for both consumers and businesses.
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