What is the difference between a central bank and a commercial bank? (2024)

What is the difference between a central bank and a commercial bank?

The central bank and Commercial bank are the important financial institutions of a country. The central bank is an institution that is responsible for the monetary policies of the country while the commercial bank provides banking and other financial services to the general public.

The main difference between the two is that a central bank is responsible for overall monetary and financial stability, whereas commercial banks focus on providing financial services to customers and making a profit.

How is a central bank different from a typical commercial bank? A central bank doesn't make loans or take deposits from individuals, but instead regulates the money supply of the entire economy.

The key difference between retail and commercial banking is who the products are designed for. While retail banks service individuals, communities, small businesses, and families, commercial banks focus on larger companies, government entities, and institutions.

The critical feature of a central bank—distinguishing it from other banks—is its legal monopoly status, which gives it the privilege to issue banknotes and cash. Private commercial banks are only permitted to issue demand liabilities, such as checking deposits.

A commercial bank is a kind of financial institution that carries all the operations related to deposit and withdrawal of money for the general public, providing loans for investment, and other such activities. These banks are profit-making institutions and do business only to make a profit.

So, the main difference between commercial banks and the central bank is that commercial banks accept deposits from the public and provide loans, while the central bank manages the country's money supply and regulates the banking system.

Commercial banking is another name for corporate banking, which offers banking services to businesses, governments, and other institutions. While retail banking offers its services to people for personal use, commercial banking serves institutions.

Why choose a commercial bank?

Using a commercial bank comes with plenty of benefits. This includes the ability to get loans, safe keeping of funds, and electronic transactions. These things are important to get from a bank.

Who we are. Wells Fargo Commercial Banking provides market-leading solutions, industry expertise, and insights to help enable our clients' growth and success, enhancing the communities we serve.

Our company is a leading global financial services firm with assets of $2.6 trillion and operations worldwide. Our rich history spans over 200 years. We are a leader in investment banking, financial services for consumers and small business, commercial banking, financial transactions processing and asset management.

Banks are community, regional or national for-profit business corporations owned by private investors and governed by a board of directors chosen by the stockholders.

While state-owned central banks now predominate, some central banks still have forms of private sector shareholding. These include central banks in the United States, Japan and Switzerland.

The 6 tools of monetary policy are reverse Repo Rate, Reverse Repo Rate, Open Market Operations, Bank Rate policy (discount rate), cash reserve ratio (CRR), Statutory Liquidity Ratio (SLR). You can read about the Monetary Policy – Objectives, Role, Instruments in the given link.

Answer: The primary functions of a commercial bank are accepting deposits and also lending funds. Deposits are savings, current, or time deposits. Also, a commercial bank lends funds to its customers in the form of loans and advances, cash credit, overdraft and discounting of bills, etc.

Advancing of loans: Extending loans is an important function of commercial banks. The deposits received by banks are not allowed to remain idle. So, after keeping certain cash reserves, the balance is given to borrowers as loans and interest is charged on these loans.

A rise in the bank rate will increase the cost of borrowing from the central bank then causes the commercial banks to increase the interest rates at which they lend. This will discourage businessmen and others from taking loans. Thus reduces the volume of credit and vice versa.

They earn interest on the securities they hold. They earn fees for customer services, such as checking accounts, financial counseling, loan servicing and the sales of other financial products (e.g., insurance and mutual funds).

How do banks create money?

Banks create money when they lend the rest of the money depositors give them. This money can be used to purchase goods and services and can find its way back into the banking system as a deposit in another bank, which then can lend a fraction of it.

Only a small portion of your deposits at a bank are actually held as cash at the bank. The rest of your money (the majority of the bank's assets) is invested by the bank into vehicles such as consumer or business loans, government bonds and credit cards. Borrowers have to pay the bank back with interest.

Commercial banks perform the function of credit creation in an economy. Therefore, the money that is created by commercial banks is known as credit money. This is achieved by the commercial banks in the form of purchasing securities and providing loans.

Classification of Banks in India

Commercial Banks can be further classified into public sector banks, private sector banks, foreign banks and Regional Rural Banks (RRB). On the other hand, cooperative banks are classified into urban and rural. Apart from these, a fairly new addition to the structure is a payments bank.

Commercial banks play a role in the creation of credit, which leads to an increase in production, employment, and consumer spending, thereby boosting the economy. As such, these banks are heavily regulated by a central bank in their country or region.