Banking What do commercial banks do?

Commercial banks, which include high street banks and building societies, operate a fairly simple business model: they borrow money from depositors (those who open an account at the bank and deposit money in it) at low rates of interest, and make a profit by lending it out at higher rates of interest. The sorts of loans offered by banks vary, and include business loans,

overdrafts, career-development loans, and mortgages (in which building societies specialise). Banks must keep hold of a certain amount of money (the ‘cash reserve ratio’, set by the government) in case depositors wish to withdraw their money. It is vital that banks manage their risk well; some of their riskier loans may default, so banks must set their rates of interest carefully to allow for this and still remain profitable.

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