2. Commercial and Investment Banks

Characteristics of Commercial Banks

Accept Savings

Lending

Act as Financial Intermediaries

Allow payments from one agent to another

Advice

Features of Investment Banks

Prop Trading

Market Making

Mergers and Acquisitions

New Issues

Underwriting

Assets on a Commercial Bank Balance Sheet

Cash

Reserves at the BoE

Interbank Lending

Short Term Investments

Advancements

Fixed Assets

Liabilities on a Commercial Bank Balance Sheet

Deposits

Short Term Borrowing

Long Term Borrowing

Shareholder’s Funds

Retained Profit (Reserves)

Objectives of Commercial Banks

Profit Maximisation

Liquidity (to avoid bank run)

Security (manage risk and avoid insolvency)

How do Commercial Banks Create Credit

Fractional Reserve Banking

Savers will deposit money, banks have to keep 10%, the remaining 90% is given out as loans

Banks will charge interest on those loans which is normally higher than the rate of return for savers’ deposits, in order to make a profit