Glossary · Money and central banks
Commercial bank
A commercial bank is an ordinary bank: it takes deposits from people and businesses and lends the money out, earning on the difference.
Also called: retail bank, high street bank, bank
Oct 2026: 3.12 points above the fed funds rate
Federal funds rate, November 9, 2026
In plain words
A commercial bank is the bank on your street or in your phone: a big national bank, a regional one, a small savings bank. It keeps your money safe, moves it when you pay, and lends to people and companies who need more than they have.
Its business is a spread. It pays savers a low rate on their deposits, lends to borrowers at a higher rate, and lives on the difference, plus fees. A bank paying 1% on savings and charging 7% on loans has 6 points to cover salaries, branches, loans that go bad, and profit.
Banks do not keep all your money in a vault: they keep a slice as cash and reserves and lend the rest, which is called fractional-reserve banking. That is why banks are tightly regulated, and why deposits are protected by deposit insurance.
Example
A small bank’s year in numbers
- Deposits: $100 million, paying 1.5% on average: $1.5 million of interest to savers.
- Loans: $85 million at 7%, earning $5.95 million. The other $15 million sits in reserves and Treasury bills at 4%, earning $0.6 million.
- Net interest income: $5.95M + $0.6M − $1.5M = $5.05 million.
- Minus salaries and branches ($3 million) and loans that go bad ($0.6 million): $1.45 million before tax.
On $100 million of deposits the bank earns well under 2% a year, so a few bad years of loan losses can wipe out a lot of profit.
One level deeper
A bank’s cost of money follows the central bank. US banks lend reserves to each other at the federal funds rate, and the biggest set their prime rate, the base for many business loans and credit cards, at the top of the Fed’s target range plus 3 points. In Oct 2026 the prime rate was 7.00%.
Commercial banks are different from investment banks, which help companies sell stocks and bonds and trade securities. In the US the Glass-Steagall Act of 1933 kept the two apart; the wall came down in 1999, and today’s biggest banks do both.
The risk in banking is a mismatch: deposits can be withdrawn any day, while loans are repaid over years. If too many depositors ask at once, even a healthy bank can fail. That is a bank run, and the reason banks must hold capital and easy-to-sell assets, and why central banks stand ready to lend to them.
What banks charge, and what money costs them
The prime rate has moved in step with the federal funds rate for decades, and since the mid-1990s it has sat 3 points above the Fed’s target (the top of its target range since 2008). In Oct 2026: prime 7.00%, fed funds 3.88%.
The numbers behind the chart
| Date | Bank prime loan rate | Federal funds rate |
|---|---|---|
| Jan 1955 | 3.0% | 1.4% |
| Dec 1960 | 4.5% | 2.0% |
| Dec 1970 | 6.9% | 4.9% |
| Dec 1980 | 20.4% | 18.9% |
| Dec 1990 | 10.0% | 7.3% |
| Dec 2000 | 9.5% | 6.4% |
| Dec 2010 | 3.2% | 0.2% |
| Dec 2020 | 3.2% | 0.1% |
| Dec 2022 | 7.3% | 4.1% |
| Dec 2023 | 8.5% | 5.3% |
| Dec 2024 | 7.7% | 4.5% |
| Dec 2025 | 6.8% | 3.7% |
| Oct 2026 | 7.0% | 3.9% |
Why it matters
Banks turn savings into loans for homes, cars and businesses; without them, money would sit idle.
Most of the money you use is created by commercial banks when they lend, so their health matters for the whole money supply.
When banks get scared and stop lending, as in 2008, the whole economy feels it; that is why governments regulate them and sometimes rescue them.
A common mistake
Myth: The bank keeps my money in a vault until I want it back.
In fact: Most of it is lent out or invested; the bank keeps only a small slice as cash and reserves. Your deposit is the bank’s promise to pay you on demand, backed by its assets, its capital and, up to a limit, by deposit insurance.
Questions people ask
What is the difference between a commercial bank and a central bank?
A commercial bank serves people and businesses and aims to make a profit. A central bank is the banks’ bank: it issues the currency, sets the key interest rate and lends to commercial banks, and it does not take deposits from the public.
How do commercial banks make money?
Mostly from the gap between what they earn on loans and investments and what they pay on deposits, called net interest income, plus fees for accounts, cards and payments.
Are credit unions commercial banks?
Not exactly. Credit unions also take deposits and make loans, but they are owned by their members and run not for profit. In the US their deposits are insured by the NCUA rather than the FDIC.
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About the numbers
- The numbers on this page are recalculated from the data every night; the sources are listed at the end of the page.
- US recessions (NBER business cycle dates): National Bureau of Economic Research (NBER), Business Cycle Dating Committee: US Business Cycle Expansions and Contractions.
- Effective federal funds rate: Board of Governors of the Federal Reserve System, H.15 Selected Interest Rates, series H15/H15/RIFSPFF_N.D (Federal funds effective rate), Data Download Program. The EFFR is subject to the Terms of Use posted at newyorkfed.org. The New York Fed is not responsible for publication of the EFFR by BigCapital, does not sanction or endorse any particular republication, and has no liability for your use.
- Bank prime loan rate: Board of Governors of the Federal Reserve System, H.15 Selected Interest Rates, series MPRIME; retrieved from FRED, Federal Reserve Bank of St. Louis.
- This page explains a term. It is not investment advice.