Sources & Uses of Funds of a Commercial Bank

Written by justin beach
  • Share
  • Tweet
  • Share
  • Pin
  • Email
Sources & Uses of Funds of a Commercial Bank
The first modern banks appeared in Renaissance Italy and quickly spread across Europe. (Jupiterimages/Comstock/Getty Images)

Commercial banks are, by definition, concerned with commerce. They are banks that provide business services including banking, credit and business loans. The lines between the types of banks have become blurred. Most banks now offer a variety of services to different clients including commercial and retail or personal banking. Some also offer investment banking and insurance.

Types of Banking

At one time, there were different types of banks for different purposes. Commercial banks handled business services and retail banks dealt with personal accounts such as checking, savings and mortgages. Investment banks handled personal and business investment accounts as well as helping companies to raise capital through investment. In some cases, laws forced banks to keep their services separate so that a downturn in one sector of the economy would not affect others.

Consolidation of Banking

Over time, as banks consolidated and bought one another, increasing pressure pushed governments to ease the rules on the separation of different types of banks. The last of these rules, the Glass-Steagall Act, which was originally passed during the great depression, was repealed in 1999. Because the banks are now consolidated, their revenues may come from any number of banking activities, including those that are not traditionally part of commercial banking.

Sources of Funds

The sources of funds for commercial banks are the same as traditional funds for all banks. Although there may be some direct investment by the bank, its primary income comes from fees and interest. Banks charge fees for most transactions. In addition, banks make loans with money that is deposited and collect interest on the loans. In the case of a purely commercial bank, these would include business loans, lines of credit and commercial real estate loans.

Uses of Funds

Banks keep a portion of their funds on hand for daily needs such as customer withdrawals and purchases. Commercial banks primarily use funds collected or deposited with them primarily for loans and then collect interest on those loans to pay their own expenses and realise profits. As publicly traded companies, part of their funds also go to pay dividends to shareholders.

Don't Miss

  • All types
  • Articles
  • Slideshows
  • Videos
  • Most relevant
  • Most popular
  • Most recent

No articles available

No slideshows available

No videos available

By using the site, you consent to the use of cookies. For more information, please see our Cookie policy.