A commercial bank connects people who have spare money with people who need it. It takes deposits, lends part of them out, charges more interest than it pays, and provides ways to make payments. This lesson describes those roles in neutral terms, with no advice about which bank or product to choose, as part of money, banking and households.
What does a bank actually do?
Think of a bank as a go-between. Savers want a safe place for money and some return. Borrowers want funds now and are ready to pay for the use of them.
The bank sits in the middle, which is why it is called a financial intermediary.
The main roles you can describe are:
- Accepting deposits, so savers have a safe place and may earn interest.
- Making loans, so households and firms can spend before they have saved enough.
- Providing payment services, such as transfers and cards, so people can pay without handling cash.
- Safe keeping of valuables and money.
Worked example: Harbor Bank
Harbor Bank is a fictional bank in a fictional economy. Savers deposit RM500,000. The bank decides to hold 20% as reserves.
Step 1, reserves. 20% of 500,000 = 0.2 × 500,000 = RM100,000. This covers day-to-day withdrawals.
Step 2, lending. The rest is lent out: 500,000 − 100,000 = RM400,000.
Step 3, interest earned. The loans carry 8% interest a year: 400,000 × 0.08 = RM32,000.
Step 4, interest paid. The bank pays depositors 3% on the RM500,000: 500,000 × 0.03 = RM15,000.
Step 5, the gap. 32,000 − 15,000 = RM17,000 a year. The bank uses this to pay staff, rent and other costs, and what remains is profit.
| Item | Calculation | Amount |
|---|---|---|
| Deposits | given | RM500,000 |
| Reserves (20%) | 0.2 × 500,000 | RM100,000 |
| Loans | 500,000 − 100,000 | RM400,000 |
| Interest received (8%) | 0.08 × 400,000 | RM32,000 |
| Interest paid (3%) | 0.03 × 500,000 | RM15,000 |
| Gap before costs | 32,000 − 15,000 | RM17,000 |
The numbers balance: reserves plus loans equal deposits, and the gap equals income minus payments.
The mistake to watch for
Mistaken answer: “A bank keeps all depositors’ money safely in its vault until they ask for it.”
This ignores lending, which is the bank’s main way of earning income.
The correction is to describe the flow. Savers deposit, the bank holds some reserves, lends the rest, and earns the difference between the interest it receives and the interest it pays.
Also avoid saying “one bank is better than another…” or naming products. The syllabus asks you to describe the role, not to recommend a bank.
A second slip is to treat the bank’s profit as the full gap. The gap of RM17,000 is before costs, so profit is smaller.
Check yourself
1. Another fictional bank receives RM200,000 in deposits and keeps 10% as reserves. How much can it lend?
Show answer
Reserves = 0.1 × 200,000 = RM20,000. Lending = 200,000 − 20,000 = RM180,000.
2. That bank lends the RM180,000 at 7% and pays depositors 2% on the RM200,000. What is the gap between interest received and paid?
Show answer
Received = 0.07 × 180,000 = RM12,600. Paid = 0.02 × 200,000 = RM4,000. Gap = 12,600 − 4,000 = RM8,600 before costs.
3. State two roles of a commercial bank and say how they connect.
Show answer
It accepts deposits from savers and it makes loans to borrowers. The deposits are the source of the funds that the bank lends, so the two roles connect savers and borrowers.
Where this leads next
The next lesson moves from banks to people: interpreting a household budget constraint. Before that, you might revisit saving and investment, since bank deposits are the link between them. The ratios with interpretation limits tool is useful for reserve and interest checks.
Describing roles precisely is a habit that grows with feedback, and it is the kind of work done in online one-to-one Economics tuition.