Commercial Banks Key Terms

Learn the right words to make commercial banks work for you

By M. Krasniak, Freelance Writer/Editor

Commercial banks provide many services to individuals and businesses. In addition to being a secure place to hold your funds, banks offer lending services in the form of personal loans or business loans. Often those personal loans are mortgages, and many banks hold mortgage-backed securities as assets. Commercial banks also offer investment services like certificates of deposit or mutual funds. Here are some key terms to help you brush up on the world of commercial banks.

Mortgage-backed security

A mortgage-backed security is a fixed income security that pays a monthly interest payment. The monthly interest payments are made up of thousands of different mortgages from across the country. Banks will often hold mortgage-backed securities as an asset in order to earn monthly interest income.
Try: Check out this description of a mortgage-backed security from Contingency Analysis.

Reserve requirement

The reserve requirement is the minimum amount of money a commercial bank must hold in a special account in order to meet customers' withdrawal needs on a day-to-day basis. If checking deposits are high, then the bank's dollar reserve requirement is also high. The reserve requirement is designed to minimize the likelihood of a run on a bank, which occurs when the bank doesn't have enough cash to satisfy its customers' demands.
Try: Auburn University has a definition of the reserve requirement.

Federal funds lending

An important function of banks is interbank lending, called Federal funds lending. If a bank's reserves fall below the minimum required level, then the bank needs to find some cash to increase its reserve account. The main source of that cash is Federal funds lending from another commercial bank.
Try: The Federal Reserve Bank of New York has a very detailed description of Federal funds lending.

Small business loan

A small business loan is money lent by the bank for the purpose of starting or expanding a business. Such loans are directed towards businesses that need ten million dollars or less of financing. A sum higher than that amount would be outside the service provided by a commercial bank. Many businesses use these loans to buy the equipment and inventory required to start the business and these assets form the collateral for the loan.
Try: Express Funding Group provides a definition of a small business loan, including a discussion of how to qualify for one.

Certificate of deposit (CD)

A certificate of deposit (CD) is a promissory note that pays a small amount of interest and matures in less than one year. They are considered to be very low risk, which is why the interest paid is so low. Individuals can purchase certificates of deposit through a commercial bank as a form of low-risk investing.
Try: Investopedia offers a definition of certificates of deposit.

Mutual fund

A mutual fund is essentially a pool of money drawn from many thousands of private people that invests the pool of money in various financial securities. Commercial banks may run their own mutual fund, or they might be able to help you buy shares in mutual funds.
Try: Investorwords.com has a comprehensive explanation of mutual funds.