A commercial bank is a financial institution that helps community members open checking and savings accounts and manage money market accounts. However, as the name implies, a commercial bank also has a broader, business-oriented focus. Most commercial banks offer business loans and trade financing in addition to the more traditional deposit, withdrawal and transfer services. With such a diverse business profile, the sources of funds in commercial banks are varied.
Deposits remain the main source of funds for a commercial bank. The money collected can go toward paying on interest-bearing accounts, completing customer withdrawals and other transactions. As of February 19, 2018, the total amount of savings deposits held at commercial banks and other banking institutions in the U.S. totaled more than $9.1 trillion.
Savings account deposits are especially important to banks as the federal Regulation D law limits the amount of times a savings account holder can withdraw money. Currently, the law mandates that account holders can perform six transfers per month in the form of online, telephone or overdraft transfers. This allows banks to use the accounts' funds and still meet the withdrawal needs of the customer.
A commercial bank builds a reserve fund with deposits so it can pay interest on accounts and complete withdrawals. Ideally, a bank's reserve fund should be equal to its capital. A bank builds its reserve fund by accumulating surplus profits during healthy financial years so that the funds can be used in leaner times. On average, a bank tries to accumulate approximately 12 percent of its net profit to build and maintain its reserve fund.
Some commercial banks that trade on the stock exchange can use shareholders' capital to receive the money it needs to stay in business. For example, if a company sells shares on the market, it increases both its cash flow and its share capital. This process is also known as equity financing. Banks can only report the amount of capital that was initially on their balance sheet. Appreciation and depreciation of shares do not count toward the total sum of a shareholder's capital.
Each time a bank makes a profit it can generally make two choices that include paying dividends to their shareholders or reinvesting the money back into the bank. Most banks utilize both options as they will retain a portion of the profit and pay the remainder to their shareholders. The amount reinvested into the bank typically depends on the company's policy and the condition of the stock market.
A lot of commercial banks earn retained earnings or fees to help fund their business. A retained earning can be collected through overdraft fees, loan interest payments, securities and bonds. Banks also charge fees for providing customers with services such as maintaining an account, offering overdraft protection and also monitoring customers' credit scores.