Definition
The term commercial bank refers to a financial institution that provides a wide variety of services such as accepting deposits and writing loans. Commercial banks may also offer credit cards and extend lines of credit to its customers.
Explanation
Traditionally, a commercial bank was a brick and mortar financial institution that employed tellers to take deposits, cash checks, and provide currency to its customers. Commercial banks might also offer safe deposit boxes for safekeeping of valuables and ATM machines for easy access to cash.
Commercial banks profit from interest rate arbitrage, whereby the interest rates paid to customers on their deposits is lower than that charged to customers that borrow money. In addition to taking deposits, commercial banks will write personal loans, mortgages, as well as automobile loans. They may also offer lines of credit, certificates of deposit, credit cards, and overdraft protection. Deposits on account at a commercial bank will be FDIC insured.
The business activities of a commercial bank are different than that of an investment bank, which may include underwriting securities, acting as an advisor during mergers and acquisitions, and the trading of securities. That being said, larger commercial banks oftentimes have an investment banking division.
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