12.2 Commercial Banks and Investment Banks

What is the primary role of a commercial bank

To manage deposits, cheques, and savings accounts for individuals and firms, and provide loans using deposited money

How does an investment bank differ from a commercial bank

Investment banks facilitate trading of stocks, bonds, and investments and have weaker government regulation and higher risk tolerance

What types of deposits do commercial banks accept

Demand deposits, fixed deposits, and saving deposits

What is the main source of income for commercial banks

Interest earned from loans provided to individuals and firms

What is a secured loan

A loan backed by an asset (e.g. a house) to protect the bank if the loan is not repaid

What is an overdraft facility

When a current account holder can borrow money even if there are no deposits, usually at a high interest and with borrowing limits

How do commercial banks invest surplus funds

By buying securities like government bonds and treasury bills

What are agency functions of commercial banks

Collecting cheques, dividends, paying bills, buying and selling securities, and transferring money for customer

What are the main components of a commercial bank’s balance sheet

Assets and liabilities

What are common assets for a commercial bank

Cash, securities, bill, loans, and investments

What is liquidity in the context of a commercial bank

The ease with which assets can be converted into cash

Why must banks balance liquidity and profitability

High liquidity limits profits, but low liquidity risks being unable to meet withdrawals

How does profitability relate to a bank’s survival

Banks need profits to pay interest, expenses, and wages, but they usually prioritise liquidity and safety over profits

What conflicts arise between liquidity, profitability, and security for banks

Prioritizing liquidity or security reduces profitability, while chasing profits can increase risk and reduce liquidity.