Commercial banking

Commercial banks are businesses that trade in money. They receive and hold deposits, pay money according to customer’s instructions, lend money, etc.

There are still many people in Britain who do not have bank accounts. Traditionally, factory workers were paid wages in cash on Fridays. Non-manual workers, however, usually receive a monthly salary in the form of a cheque or a transfer paid directly into their bank account.

A current account (US: checking account) usually pays little or no interest, but allows the holder to withdraw his or her cash with no restrictions. Deposit accounts (in the US also called time or notice accounts) pay interest. They do not usually provide cheque (US: check) facilities, and notice is often required to withdraw money. Standing orders and direct debits are ways of paying regular bills at regular intervals.

Banks offer both loans and overdrafts. A bank loan is a fixed sum of money, lent for a fixed period, on which interest is paid; banks usually require some form of security or guarantee before lending. An overdraft is an arrangement by which a customer can overdraw an account, i.e. run up a debt to an agreed limit; interest on the debt is calculated daily.

Banks make a profit from the spread or differential between the interest rates they pay on deposits and those they charge on loans. They are also able to lend more money than they receive in deposits because depositors rarely withdraw all their money at the same time. In order to optimize the return on their assets (loans), bankers have to find a balance between yield and risk, and liquidity and different maturities, and to match these with their liabilities (deposits). The maturity of a loan is how long it will last; the yield of a loan is its annual return - how much money it pays - expressed as a percentage.