Mention the term “commercial bank" and the likes of Chase, Citicorp and Bank of America immediately come to mind. You may have a checking account, a mortgage, a credit card or an investment adviser at one of these. Your employer may also have set up a checking account, taken out business loans or gotten help floating a stock offering there, too. An almost generic term today, the “commercial bank” for centuries catered exclusively to a business clientele.
Also called merchant banks or trading banks, these institutions either had a state or national charter or were privately held. They provided corporations checking accounts, loans and letters of credit. Consumers had to go to retail banks to get checking and saving accounts, mortgages and consumer loans. Companies looking to raise capital turned instead to an investment bank. Deregulation in the 1990s changed all this. A typical large “commercial” bank today engages in all three activities.
The Comptroller of the Currency issues a national charter once an applicant meets its capitalization and management requirements. Thereafter it must deposit 3 percent of its capital and surplus with the Federal Reserve, deposit another 6 percent upon request and insure depositors through the Federal Deposit Insurance Corporation. State-chartered banks answer to state-appointed regulators. They periodically review banks’ books and have the power to fine, issue cease-and-desist orders and remove officers. Said banks do not have to join the Federal Reserve System. Private banks operate without a charter.
Merchant banks predate retail and investment banks by many centuries. In the Middle Ages, traders found gold and silver coins burdensome and dangerous to carry. Goldsmiths volunteered to hold the coins and give traders more portable, redeemable certificates of ownership in return. Traveling merchants soon began using the certificates directly in transactions. This practice morphed into the promissory notes of 18th-century commercial banks, then into the check and the bank note.
Thanks to the repeal of the Depression-era Glass-Steagall Act in 1999, consumers, companies and nonprofits today can go to one bank and open checking and saving accounts; get credit cards, mortgages, car loans, business loans, bank drafts, standby letters of credit and guarantees; buy insurance or unit-trusts; and rent safety deposit boxes. The banks can trade stocks, bonds, commodities, foreign exchange and futures; underwrite stocks and bonds and offer brokerage services; process and settle checks; run fee-generating ATM networks, online banking services and walk-in branch-banking operations.
Without commercial banks processing their transactions, extending credit and raising capital, businesses could not function at today’s scale. Economic growth would come to an abrupt halt and output would steadily decline thereafter. Without consumer credit, many houses could not be built or bought, cars couldn't be purchased, educations couldn't be paid for and consumer goods couldn't be acquired. Our quality of life would quickly deteriorate. No wonder then that a crisis in the banking industry causes everyone to shudder. It has become a linchpin of the modern world.