Question

2. Identify the three main types of commercial banks. Explain how a typical commercial bank is capitalized.

Answer 1

The commercial banks are the institutions that offer demand deposits and provide loans. They provide financial services to public and business and ensure stability and liquidity in the economy. There are three main types of commercial banks -

1. Public sector banks: These kinds of banks are nationalized by the government of a country and the major stakeholder is the government of that country.
2. Private sector banks: The major stakeholders of private sector banks are businesses are individuals of that country.
3. Foreign banks: The major stakeholders of foreign banks are foreign institution or banks.

Bank capitalization means that the capital of a bank that is available for the bank to invest and support its operations. A typical commercial bank is capitalized by its owners contribution and accepting deposits from the public. A balance between all sources of capital is very important for efficiency of a bank. A well-capitalized banking system ensures financial stability in economy.