COMMERCIAL BANK

A commercial bank is a financial institution that is authorized by law to

receive money from businesses and individuals and lend money to them.
Commercial banks are open to the public and serve individuals, institutions,
and businesses. A commercial bank is almost certainly the type of bank you
think of when you think about a bank because it is the type of bank that
most
people
regularly
use.
Banks are regulated by federal and state laws depending on how they are
organized and the services they provide. Commercial banks are also
monitored
through
the
Federal
Reserve
System.
Functions
A commercial

bank

is

authorized

to

serve the

following functions:

Receive deposits - take money in from individuals and businesses (called

depositors)
Disburse payments - make payments upon the direction of its
depositors, such as honoring a check
Collections - a bank will act as your agent to collect funds from another
bank payable to you, such as when someone pays you by check drawn
on an account from a different bank
Invest funds in securities for a return
Safeguard money - banks are considered a safe place to store your
wealth
Maintain and service savings and checking accounts of its depositors
Maintain custodial accounts - accounts controlled by one person but for
the benefit of another person, such as a trust account

There are more actions, of course, and finer categories within this broad
view. Commercial banks may offer other services such as brokering
insurance contracts, giving investment advice and so on. They also provide a
wide variety of loans and offer other credit vehicles like cards and overdrafts.
However, the common theme among these activities is that they are aimed
at providing a financial service to an individual or business.
(1) Primary Function:
1. Accepting Deposits:
It is the most important function of commercial banks.
They accept deposits in several forms according to requirements of different
sections of the society.

The main kinds of deposits are:

(i) Current Account Deposits or Demand Deposits:
These deposits refer to those deposits which are repayable by the
banks on demand:
1. Such deposits are generally maintained by businessmen with the intention
of making transactions with such deposits.
2. They can be drawn upon by a cheque without any restriction.
3. Banks do not pay any interest on these accounts. Rather, banks impose
service charges for running these accounts.
(ii) Fixed Deposits or Time Deposits:
Fixed deposits refer to those deposits, in which the amount is deposited with
the bank for a fixed period of time.
1. Such deposits do not enjoy cheque-able facility.
2. These deposits carry a high rate of interest.
Basis

Demand Deposits

Fixed Deposits

Cheque
facility

They are chequeable deposits.

They
are
deposits.

Interest
payments

They do not carry any interest.

They carry interest which varies

directly with the period of time.

non-chequeable

Depositor generally makes only

two transactions: (i) Deposit of
The depositor can make anyMoney in the beginning;
Number
of
number of transactions for
transactions
deposit or with drawl of money.
(ii) Withdrawal of money on
maturity.
(iii) Saving Deposits:
These deposits combine features of both current account deposits
and fixed deposits:

1. The depositors are given cheque facility to withdraw money from their
account. But, some restrictions are imposed on number and amount of
withdrawals, in order to discourage frequent use of saving deposits.
2.They carry a rate of interest which is less than interest rate on fixed
deposits. It must be noted that Current Account deposits and saving deposits
are chequable deposits, whereas, fixed deposit is a non-chequable deposit.
2. Advancing of Loans:
The deposits received by banks are not allowed to remain idle. So, after
keeping certain cash reserves, the balance is given to needy borrowers and
interest is charged from them, which is the main source of income for these
banks.
Different types of loans and advances made by Commercial banks
are:
(i) Cash Credit:
Cash credit refers to a loan given to the borrower against his current assets
like shares, stocks, bonds, etc. A credit limit is sanctioned and the amount is
credited in his account. The borrower may withdraw any amount within his
credit limit and interest is charged on the amount actually withdrawn.
(ii) Demand Loans:
Demand loans refer to those loans which can be recalled on demand by the
bank at any time. The entire sum of demand loan is credited to the account
and interest is payable on the entire sum.
(iii) Short-term Loans:
They are given as personal loans against some collateral security. The money
is credited to the account of borrower and the borrower can withdraw money
from his account and interest is payable on the entire sum of loan granted.
(2) Secondary Functions:
1. Overdraft Facility:
It refers to a facility in which a customer is allowed to overdraw his current
account upto an agreed limit. This facility is generally given to respectable
and reliable customers for a short period. Customers have to pay interest to
the bank on the amount overdrawn by them.
2. Discounting Bills of Exchange:

It refers to a facility in which holder of a bill of exchange can get the bill
discounted with bank before the maturity. After deducting the commission,
bank pays the balance to the holder. On maturity, bank gets its payment
from the party which had accepted the bill.
3. Agency Functions:
Commercial banks also perform certain agency functions for their customers.
For these services, banks charge some commission from their clients.
Some of the agency functions are:
(i) Transfer of Funds:
Banks provide the facility of economical and easy remittance of funds from
place-to-place with the help of instruments like demand drafts, mail
transfers, etc.
(ii) Collection and Payment of Various Items:
Commercial banks collect cheques, bills, interest, dividends, subscriptions,
rents and other periodical receipts on behalf of their customers and also
make payments of taxes, insurance premium, etc. on standing instructions of
their clients.
(iii) Purchase and Sale of Foreign Exchange:
Some commercial banks are authorized by the central bank to deal in foreign
exchange. They buy and sell foreign exchange on behalf of their customers
and help in promoting international trade.
(iv) Purchase and Sale of Securities:
Commercial banks buy and sell stocks and shares of private companies as
well as government securities on behalf of their customers.
(v) Income Tax Consultancy:
They also give advice to their customers on matters relating to income tax
and even prepare their income tax returns.
(vi) Trustee and Executor:
Commercial banks preserve the wills of their customers as trustees and
execute them after their death as executors.
(vii) Letters of Reference:

They give information about the economic position of their customers to

traders and provide the similar information about other traders to their
customers.
4. General Utility Functions:
Commercial banks render some general utility services like:
(i) Locker Facility:
Commercial banks provide facility of safety vaults or lockers to keep valuable
articles of customers in safe custody.
(ii) Travellers Cheques:
Commercial banks issue travelers cheques to their customers to avoid risk
of taking cash during their journey.
(iii) Letter of Credit:
They also issue letters of credit to their customers to certify their
creditworthiness.
(iv) Underwriting Securities:
Commercial banks also undertake the task of underwriting securities. As
public has full faith in the creditworthiness of banks, public do not hesitate in
buying the securities underwritten by banks.
(v) Collection of Statistics:
Banks collect and publish statistics relating to trade, commerce and industry.
Hence, they advice customers on financial matters. Commercial banks
receive deposits from the public and use these deposits to give loans.
However, loans offered are many times more than the deposits received by
banks. This function of banks is known as Money Creation.
Examples of Commercial Banks in Philippines
Bank of the Philippine Islands
Citibank Philippines
Products offered by commercial banks
1. Deposit Services
-include all deposit products that are liabilities on the banks books: checking
accounts, savings accounts, CDs, money market accounts

-When looking at deposit services offered by banks, the main focus should be
on interest rates (for those products that pay interest), minimum balances,
ease of transfers/transactions (some banks, for example, restrict the number
of transactions that can be drawn on savings and money-market accounts),
and term length for services like CDs.
2. Loan Services
These are most typically loans, from short-term cash-flow loans, lines of
credit and credit cards to long-term commercial mortgages.
3. Convenience Products
At the most basic level, these services include things like electronic banking
and fund transfers, asset safekeeping and deposit boxes, as well as more
specialized services like asset management and financial advice.
At a minimum, most business owners need to find a commercial bank that
fits their needs for electronic banking. This usually entails being able to track
accounts and transfer money through the banks website, as well as a large
ATM network. Recently these services have also expanded to include
electronic check depositing and mobile banking on smartphones. Other
convenience and miscellaneous services offered by commercial banks can be
very specialized, and must be evaluated within the framework of what does
my
business
need
to
succeed?
INVESTMENT BANKS

help companies and governments and their agencies to raise money

by issuing and selling securities in the primary market. They assist
public and private corporations in raising funds in the capital markets
(both equity and debt), as well as in providing strategic advisory
services for mergers, acquisitions and other types of financial
transactions.

Investment banks also act as intermediaries in trading for clients.

Investment banks differ from commercial banks, which take deposits
and make commercial and retail loans.

In recent years, however, the lines between the two types of structures
have blurred, especially as commercial banks have offered more
investment banking services.

Investment banks may also differ from brokerages, which in general

assist in the purchase and sale of stocks, bonds, and mutual funds.
However some firms operate as both brokerages and investment

banks; this includes some of the best known financial services firms in
the world.

In the strictest definition, investment banking is the raising of funds,

both in debt and equity, and the division handling this in an investment
bank is often called the "Investment Banking Division" (IBD).

Products:

Only a few small firms provide only this service. Almost all
investment banks are heavily involved in providing additional
financial services for clients, such as the trading of derivatives,
fixed income, foreign exchange, commodity, and equity
securities.

However, only a few small firms provide only this service.

Almost all investment banks are heavily involved in providing
additional financial services for clients, such as the trading of
derivatives, fixed income, foreign exchange, commodity, and
equity securities.

The "buy side" constitutes the pension funds, mutual funds,

hedge funds, and the investing public who consume the
products and services of the sell-side in order to maximize
their return on investment. Many firms have both buy and sell
side components.

INSURANCE COMPANIES
The primary function of an insurance company is to safeguard your business
against such losses and to protect your familys financial security after you
die. But some types of life insurance can also help you build assets to meet
needs during your lifetime.The type of business you own determines the type
of insurance you need. The government requires you to have certain types of
insurance to protect the public, and lenders require insurance to protect their
investment.
Life insurance can help:

Pay debts and taxes after your death

Allow your family to maintain its standard of living

Support your dependents goals and dreams

Provide immediate access to cash1

Certain types of life insurance also may serve as:

A supplement for your retirement income

A funding vehicle for a college education, starting a business, an

emergency, or buying a second home

Required Insurance
The government requires certain types of insurance if you are an employer.
According to the Small Business Administration, you must purchase, at
minimum, workers' compensation and unemployment insurance. These
insurances provide your employees with a financial safety net if they are hurt
on the job or lose their job. Your employees do not pay any part of the
premiums for these plans. You can deduct the premiums you pay as a
business expense when you file your taxes.
Liability Insurance
Liability insurance policies pay the legal fees and judgments associated with
accidents, negligence and professional errors. The government requires
some companies and professionals to carry liability insurance. For example,
trucking companies must have general liability insurance, and physicians
must have professional liability insurance. If you receive notice of a lawsuit,
your insurance company's function is to hire lawyers to represent you in
court. Your insurance company pays any settlements or judgments against
your company up to the policy's limits. Manufacturers often have product
liability insurance that pays if a product has a defect that results in an injury.
Property Insurance
Property insurance comes in three types: basic, broad and special, according
to the InsureU website. Examples of items covered by policies include your
business's buildings, machinery, inventory and even your copyrights and
trademarks. While coverage differs depending on the type of policy, the
insurance company's function is to pay for damages or losses after storm
damage or theft. Business interruption policies pay for your lost earnings if
you have to close your business while repairs are made from storm or fire
damage. Property insurance policies typically pay for either replacement
costs or the actual value of the property before the damage or loss occurred.
Home-based Businesses

If you have a home-based business, you may think your homeowner's policy
covers all of your insurance needs. This is not necessarily so. It may be
possible to add an endorsement to your homeowner's policy to cover your
business. If your revenues are above $5,000, clients come to your home or
you have expensive equipment, you should talk to an agent about standalone policies such as a business owner's policy. The company insuring your
home-based business is there to provide assistance if you are sued and pay
for losses from theft and storms.
4. Brokerages
From the point of view of the retail investor, it is often appropriate to refer to
an investment dealer as a broker. When we deal with a securities firm as an
individual, we are asking that firm to broker a transaction on our behalf.
However, we should know that the firm has plenty of other business that
does not involve retail trades. In fact, the
firm'sunderwriting and principal trading may form the largest portion of its
ongoing business. Here we look at what these activities are and how they
function in the process of issuing securities.
The Primary Market
Perhaps the most lucrative aspect of the securities business is the selling of
new securities issues to large institutional and retail investors. The sale of
new issues in this manner constitutes what is known as the primary market.
Originally, only securities firms were involved in this business activity, which
is called underwriting or financing, and it did not involve the retail broker
whatsoever. However, most integrated firms now have both underwriting
departments and brokering departments.
In its function as an underwriter, a firm owns the new security issue as part
of its inventory, thereby taking on a certain amount of risk. The rewards for
taking this risk, however, are often huge: the underwriting firm receives a
profit from the difference between the buying and selling prices, so naturally,
this firm will aim to sell as many units of the issue as possible at the highest
price possible. By contrast, the new issuer generally does not assume the
same risk, since payment is guaranteed by the underwriter regardless of the
price at which the issue eventually sells in the market, or even whether it
sells at all.

Given the risks involved, the securities issuer and its investment dealer work
together very closely to determine the original price for the issue, its timing
and other marketability factors that will help attract investors. In general, the
underwriting firm is concerned that the price of the securities might
deteriorate while they are in inventory, which would erode profits or even
turn potential profits into losses. To deal with the large risks involved, a
consortium of like-minded investment firms will form to mitigate some of the
individual risk and ensure a speedy distribution of securities among all of the
firms' clients, instead of those of only one firm.
In negotiating the terms of the primary securities issue, the underwriting firm
uses all of its expertise of trading in the secondary market (which we define
in detail below). The firm gains a sense of the nature of the market to which
the new issue of securities will be released - the security's current
attractiveness to investors and the market valuation of close competitors.
One of the reasons why investment firms became involved in both aspects of
the market around the mid-20th century is that they possessed expertise in
the secondary market, which aids in primary market sales.
Principal Trading
Once a new security is transacted between its issuer and an underwriter,
that security is considered issued and outstanding and, as such, it begins to
trade on the secondary market. Investment firms participate on the
secondary market in one of two ways: as principals, holding securities for
sale in their own inventory, and as agents, acting on behalf of a buyer or
seller but not owning the security at any point during the transaction.
In principal trading, the investment firm hopes to profit from buying
securities in the open market, holding them in its own inventory for a certain
period of time, and selling them later for a higher price. As mentioned
earlier, it is advantageous for investment firms to engage in principal trading
because they're well acquainted with current market conditions and,
therefore, they have the expertise to devise suitable benchmarks for pricing
primary market issues or the yields on new bond issues.
Another advantage an investment firm gains from principal trading activities
is liquidity. Because it can accomplish the buy or the sell side of any
transaction with its own inventory, the investment firm need not wait for
simultaneous matching of buy and sell orders from outside investors in order
to complete a transaction. This advantage of principal trading greatly adds to
the liquidity of the market and ensures that there will typically be a buyer for
almost every security, even if retail investors are generally not active in
trading that security. (To learn more about this process, check out The NittyGritty Of Executing A Trade.)
Broker or Agency Transactions

In terms of investment banking, the role of the securities broker is the one
with which retail investors are most familiar. In their function as brokers,
firms simply act as an agent or intermediary in a transaction on the
secondary market, never actually owning the securities themselves. The
broker can represent buyers and sellers, who in fact are the principals, or
owners of the securities. In exchange for facilitating or executing a trade,
brokers charge their clients a commission.