# Commercial banking: how the industry works Canonical: https://industrywiki.org/industry/commercial-banking/ Published: 2026-10-26 Commercial banks provide deposits, credit and payments. Their economics depend on funding stability, loan quality and how quickly assets and liabilities reprice. ## scope Deposit-taking banks serving households and businesses. This profile separates lending and transaction banking from investment management and securities underwriting. Monetary mechanics are illustrated with Bank of England explanations; supervisory references are U.S. sources. ## segments ### name Retail banking ### description Deposit accounts, mortgages and consumer credit use standardized products and a broad customer base. ### name Business banking ### description Loans, revolving facilities and cash-management services require understanding business cash flows and collateral. ### name Transaction banking ### description Payments, collections and treasury services earn fees and can anchor operating deposits. ## flow ### name Acquire and verify customers ### description Establish identity, beneficial ownership where applicable, account terms and payment access. A deposit is the bank’s liability to its customer. ### name Underwrite credit ### description Assess repayment capacity, collateral and concentration. Disbursing a loan normally creates a bank asset and a matching customer deposit; approving an undrawn facility does not. ### name Fund and settle ### description Customer spending can move deposits to other banks. Treasury must obtain settlement liquidity and maintain a stable funding mix. ### name Service and monitor ### description Collect interest, process payments, monitor covenants and identify arrears. Expected credit losses are estimated before all defaults are realized. ### name Repay or resolve ### description Principal repayment reduces the loan. Distressed exposures may be restructured or recovered; economic loss depends on recovery and timing. ## economics ### revenue Unit Interest earned on loans and securities, plus account, payment and service fees. ### payers Borrowers pay interest; business and household customers pay service fees. Depositors may receive interest from the bank. ### costs #### name Funding #### explanation Deposit interest and wholesale borrowing costs can change faster than the income on fixed-rate loans. #### name Credit losses #### explanation Some borrowers cannot repay. A high contractual loan yield is not the same as a high risk-adjusted return. #### name Operating infrastructure #### explanation People, branches, technology, compliance, fraud prevention and payment processing support the balance sheet. ### capital Equity and qualifying regulatory capital absorb losses and constrain risk-taking. Capital is not interchangeable with the cash needed to meet a withdrawal today. ### working Capital A bank manages liquidity and maturity mismatches rather than a conventional inventory cycle. Short-notice deposit liabilities may fund loans repaid over years. ### mechanism Net interest income is interest revenue less interest expense. Margin depends on asset mix, funding mix and repricing dates; raising policy rates does not mechanically raise profits. A funding run can force asset sales before underlying loans mature. ## operations ### activities - Credit assessment and portfolio monitoring - Deposit operations and payment reconciliation - Asset-liability management and liquidity stress testing ### assets - Loan portfolio - Liquid securities and settlement balances - Core banking and security systems ### roles - Credit officer - Treasurer - Relationship manager - Risk and compliance teams ### records - Loan agreement and collateral file - Account ledger and reconciliation - Liquidity forecast and credit-loss estimate ### software - Core banking platform - Payment processing - Credit workflow and risk reporting ### metrics #### name Net interest margin #### definition Net interest income divided by average interest-earning assets. #### why Makes spread income comparable to the earning balance sheet, but excludes fee income and credit costs. #### name Nonperforming loan ratio #### definition Nonperforming loans divided by loans under a stated definition. #### why Signals deterioration; classification rules and recoveries matter. #### name Deposit concentration #### definition Share of deposits attributable to large or connected depositor groups. #### why A concentrated funding base may leave faster than a diversified one. ## structure - Banks compete on trust, service, access and price. A payments relationship can attract transaction balances, while expertise in a local business sector can improve credit selection. Both advantages can be offset by excessive concentration. - Scale spreads technology and compliance costs, but a large balance sheet can also accumulate correlated exposures. Regulatory capital, liquidity requirements and supervision affect feasible growth; their exact rules differ by jurisdiction and institution. ## risks ### risk Funding flight ### mechanism Many customers withdraw together, requiring liquidity before long-term assets can be collected. ### risk Repricing mismatch ### mechanism Deposit costs rise while fixed-rate asset income remains unchanged; market values may also fall. ### risk Correlated defaults ### mechanism A regional or sector shock weakens multiple borrowers and their collateral at once. ## dependencies ### upstream #### slug software #### label Software #### relationship Core platforms run ledgers, servicing and risk reporting. #### slug telecommunications #### label Telecommunications #### relationship Reliable networks connect branches, customers and payment rails. ### downstream #### slug construction #### label Construction #### relationship Developers and contractors use financing and cash-management services. #### slug real-estate #### label Real estate #### relationship Property borrowers use mortgages and commercial real-estate loans. #### slug payments #### label Payments #### relationship Payment firms rely on bank accounts, settlement access and safeguarded-funds arrangements where required. ### substitutes #### label Nonbank lenders and capital markets #### relationship Can supply credit, but do not provide every deposit and settlement function of a bank. ## worked Example ### title Funding reprices before loans ### assumptions - Illustrative annual model: $100 million of earning assets yield 6%. - $90 million of interest-bearing funding costs 2%; other funding is assumed costless. - Balances, asset yield and all other costs remain fixed. ### calculation - Interest income: $100m × 6% = $6m. Interest expense: $90m × 2% = $1.8m. - Net interest income is $4.2m; net interest margin is $4.2m ÷ $100m = 4.2%. - At a 3% funding cost, expense becomes $2.7m and net interest income falls to $3.3m. ### takeaway A one-percentage-point funding increase removes $0.9m of spread income. This is before operating expenses, credit losses and taxes. ## scenario ### change Depositors move balances into higher-yielding alternatives. ### effects - The bank must either pay more to retain deposits or replace them with another funding source. - Funding cost rises or available liquidity falls, especially if assets cannot reprice or mature quickly. - New lending may become more expensive or more selective; a liquidity problem can amplify a credit slowdown. ### watch - Funding cost by source - Deposit outflows and concentration - Asset repricing schedule ## misconceptions ### claim Banks simply lend out a fixed pile of existing deposits. ### correction Lending creates deposits, but banks still face settlement, funding, capital, risk and borrower-demand constraints. ### claim A profitable bank cannot run out of cash. ### correction Accounting earnings and immediately available liquidity are different; illiquid assets cannot always meet sudden withdrawals without loss. ## sources ### id boe-money ### title How is money created? ### organization Bank of England ### url https://www.bankofengland.co.uk/explainers/how-is-money-created ### supports Loan-created deposits, repayment and interbank settlement constraints; UK explainer last updated 2019. ### id occ-liquidity ### title Liquidity, Comptroller’s Handbook ### organization Office of the Comptroller of the Currency ### url https://www.occ.treas.gov/publications-and-resources/publications/comptrollers-handbook/files/liquidity/pub-ch-liquidity.pdf ### supports U.S. supervisory treatment of liquidity, funding concentrations and interactions among risks. ### id occ-irr ### title Interest Rate Risk ### organization Office of the Comptroller of the Currency ### url https://www.occ.gov/publications-and-resources/publications/comptrollers-handbook/files/interest-rate-risk/index-interest-rate-risk.html ### supports Repricing, basis, yield-curve and option risks; March 2020 handbook overview. ### id fdic-study ### title FDIC Community Banking Study 2020 ### organization Federal Deposit Insurance Corporation ### url https://www.fdic.gov/resources/community-banking/report/2020/2020-cbi-study-full.pdf ### supports Net interest margin and community-bank business model; historical evidence, not a current performance benchmark. ## evidence ### scope - boe-money - fdic-study ### flow - boe-money - occ-liquidity ### economics - fdic-study - occ-irr ### operations - occ-liquidity ### structure - fdic-study - occ-liquidity ### risks - occ-liquidity - occ-irr ## related Concepts - working-capital - operating-leverage - regulation-and-market-entry ## classification ## editorial Note The operating model and causal analysis are editorial synthesis. All worked-example figures are invented assumptions for explanation, not industry benchmarks. Regulations and payment conventions vary by jurisdiction. ## companies ### selection Note Illustrative examples span consumer banking, business lending and international transaction banking across several regions. This alphabetical selection is not a revenue, asset-size or quality ranking. ### verified On 2026-10-26 ### entries #### name Bank of America #### kind Company #### segment Consumer and business banking #### description Serves individuals, small businesses and institutions through banking and related financial services. Its customer range illustrates how one banking group supports households and commercial clients. #### url https://about.bankofamerica.com/en/our-company #### name BNP Paribas #### kind Company #### segment Diversified banking group #### description Provides banking and financial services through businesses operating in Europe and other regions. Its group structure illustrates the coordination of different customer and product lines. #### url https://group.bnpparibas/en/group #### name Citi #### kind Company #### segment International transaction banking #### description Connects corporate and institutional clients across markets and provides banking services for customers. Its international network makes cross-border financial flows a useful operating-model example. #### url https://www.citigroup.com/global/about-us #### name DBS #### kind Company #### segment Consumer and institutional banking #### description Provides consumer banking, wealth management and institutional banking services. Its combination of customer segments illustrates how digital delivery supports both individuals and business banking relationships. #### url https://www.dbs.com/annualreports/2024/who-we-are.html #### name HDFC Bank #### kind Company #### segment Retail and business banking #### description Offers savings accounts, lending and other banking products in India. Its product range illustrates how a bank serves household needs alongside business financing and transactions. #### url https://www.hdfc.bank.in/about-us/who-we-are #### name HSBC #### kind Company #### segment International banking #### description Provides banking services through businesses serving different customer groups and markets. Its international presence illustrates the role banks play in connecting trade, investment and customer relationships. #### url https://www.hsbc.com/who-we-are/hsbc-at-a-glance #### name JPMorganChase #### kind Company #### segment Consumer and commercial banking #### description Serves consumers and businesses through Chase and corporate and institutional clients through J.P. Morgan. These complementary businesses illustrate the different customer relationships within a banking group. #### url https://www.jpmorganchase.com/about #### name MUFG Bank #### kind Company #### segment Corporate and commercial banking #### description Maintains banking relationships with customers in Japan and overseas. Its international office network illustrates how banks support businesses operating across more than one national market. #### url https://www.bk.mufg.jp/global/aboutus/index.html #### name Santander #### kind Company #### segment Retail banking group #### description Operates retail banking businesses across Europe and the Americas. Its model illustrates how a shared banking group combines customer relationships and operating capabilities across distinct national markets. #### url https://www.santander.com/en/about-us #### name Standard Chartered #### kind Company #### segment Cross-border corporate banking #### description Connects corporate, institutional and affluent clients through a network focused on Asia, Africa and the Middle East. It illustrates banking organized around international customer connections. #### url https://www.sc.com/en/about/ Examples are illustrative, not benchmarks. Editorial method: https://industrywiki.org/methodology/