Commercial banks are those institutions that consumers are most familiar with as the banks hold deposits and provide other simple services. Like all businesses, commercial bank regulation is necessary to maintain these organizations, at least in the government’s opinion. Government controls the amount of money commercial banks must maintain in their coffers, fees charged to users, and deposit insurance. All commercial banks fall under commercial bank regulation at either the federal or state level at some point. One main purpose of the regulations is to prevent commercial bank failure.
All banks do not need to keep the entire deposit amount from customers in their coffers. The government’s central bank typically controls this amount by setting a specific fund retention rate for deposited funds. While commercial bank regulation often requires banks to maintain a few days of deposits in the institution, the other funds are available for investment. Strict regulation prevents loaning too many funds out at one time, which can result in the potential for a bank run. For example, a bank that does not have enough funds to meet withdrawal demands can experience trouble.
Banks — commercial or otherwise — are notorious for the fees that may go with certain activities or account types. Account holders can usually shop among different commercial banks in order to find those that charge the least amount of fees for banking activities. Commercial bank regulation, however, often results in copious fees charged to banks as governments desire income from these institutions. In order to remain profitable, commercial banks pass on certain regulatory fees to consumers in order to remain profitable. Bank fees can increase as these institutions face more regulations and increases to their charges or taxes.
Deposit insurance is a government safety net that protects account holders from financial institutions that experience bank runs. Part of the commercial bank regulation may place fees received from these institutions into a fund for deposit insurance. The insurance amount protects each account holder up to a certain dollar amount, meaning that any deposits lost by account holders have government insurance plans. Therefore, account holders can feel somewhat secure that their savings will not evaporate into thin air when a commercial bank fails. Commercial bank regulation may have an unintended consequence as banks may engage in riskier financial plans because they believe the government will bail out account holders if things go wrong.