9.4.4—Commercial banks

Commercial banks accept deposits, make loans, facilitate payments and provide other financial services. They transform short-term liquid liabilities into longer-term, less liquid assets and earn income from the spread and fees.

Banks face credit, liquidity, interest-rate and operational risks. Capital requirements, reserves, collateral and confidence constrain lending; a bank cannot safely lend every deposited dollar indefinitely.

A bank may fund a five-year business loan with a mixture of deposits and longer-term finance, but must still meet withdrawals and absorb defaults.

Banks are not simply passive intermediaries transferring pre-existing savings, and a loan creates a deposit but also creates a liability for the borrower.