This is the fourth in a series of articles on the U.S. banking system. Each article will cover one type of financial institution that engages in banking. This fourth article covers commercial banks. The last article covered mutual banks. Future articles will cover additional types of banks.
Commercial banks are probably the ones you are most familiar with – think big names like Bank of America and Wells Fargo.
Commercial banks serve individuals, businesses and organizations. What they do varies of course, but basically, they offer deposit accounts, as well as loans.
"Commercial banks are in the business of extending credit. The larger the loan amount, the greater the interest that accrues over the life of the loan. Therefore, commercial banks welcome big business borrowers. These are long-established companies that are very profitable," says Joseph Camberato, president of National Business Center. "This way, the long timeline associated with commercial banks’ application/decision/financing process does not create an interim working capital issue for them. Application fees and other associated costs are often offset over time by the deductible interest on the loan. In this scenario, the loan process is mutually beneficial."
However, small and medium businesses that are less liquid may find the process more of an obstacle, "Few are prepared to wait up to several months for a financing decision. Extending financing to smaller businesses is not as profitable as loans made to larger firms seeking more money. So there is a much smaller pool set aside for small business and stringent qualification requirements, too. Commercial banks are highly regulated and that usually means restrictions on how the money may be used," says Camberato.
Commercial banks can have a national or state charter and are regulated by federal and state laws and supervised by agencies such as the Office of the Comptroller of the Currency (OCC), the Federal Reserve (FRB) and the Federal Deposit Insurance Corporation (FDIC).
The role commercial banks play in the economy is huge. They are the engine. Without them, nobody’s going anywhere. Commercial banks are for sure, the granddaddy of financing for private capital investment. Whereas do people and companies go when they need the kind of cash to move the needle in their business – be it purchasing equipment or in the case of regular folk, the all important mortgage. When money is being spent in these areas it’s always a sign of economic health. Simply put, commercial banks make the world go around.
But just like commercial banks can be more beneficial for large companies, some independent lenders are doing their best to compete by focusing on a small slice of the individual mortgage pie. "We may not have the brand recognition of a Wells Fargo and Navy Federal due to their marketing, but we have a niche in only doing mortgages," says Celia Baskette, media relations coordinator for Atlantic Bay Mortgage Group. "Commercial banks are backing out of mortgages and independent lenders are rising," she says.
Baskette cautions that commercial banks do not always have licensed loan officers. "Licensed loan officers must pass a background check, credit check, complete required training and also pass state and national examinations. Some bankers who work for the federally chartered institutions are registered with the NMLS (Nationwide Mortgage Licensing System); however, this does not mean that they completed the licensing requirements. All of our loan officers must be licensed," says Baskette.
She also points out that commercial banks, because they have so many products, initiatives and goals (credit cards, checking and savings accounts, car loans, home loans, etc.) that closing times on loans can be quite long. "The customer doesn’t receive the best service," she says and boasts that her firm averages a closing time of 27 days, compared to 44 for commercial banks.
Commercial banks are facing increasing competition from alternative financing companies. "Since the 2008 economic downturn, alternative financing companies have increased in popularity," says Camberato.
While they are not banks, they offer assistance to business owners to obtain many of the same financing as commercial banks, such as business lines of credit, equipment financing and small business loans. "There is no restriction as to how the financing may be used, or vendor requirements. The chief difference between commercial banks and alternative financing companies is the speed and the criteria on which these financing decisions are made – in a day or less. Once approved, the financing is available in days," he says.
Although commercial banks have competitors nipping at their heels, they’re too big too fail.