Banks are the lifeblood of our economy. They provide the capital for essential infrastructure projects, growing small businesses, and the dream of owning a home. Banking may look different than in the past; online banking, peer-to-peer mobile payments and the emergence of mega banks but the basic tenets are the same.
Commercial banks in the U.S. custody $15.58 trillion in assets.1 Nearly half that amount is controlled by the five largest banks (JP Morgan Chase alone accounting for 13% of the total).2 Banks also employ roughly 1 million Americans.3 Needless to say, it is very important that these banks stay financially sound.
But what actually is commercial banking and how is it different from other types of banks? Here is a more in depth look at the commercial banking career paths.
What is Commercial Banking?
A commercial bank is exactly what you’d think of when you hear ‘bank’-a building with branch offices with people coming in and transacting business. Technically, commercial banks are financial institutions that are licensed to accept and lend out customer deposits. The customers of commercial banks can be both individuals and businesses (sometimes the term ‘commercial bank’ is used just for business and ‘retail bank’ is used for individuals but more often commercial banks encompass both types of customers).
Commercial banks provide a variety of services to their customers. These include safeguarding of deposits, providing checking and bill pay services, offering investment products, funds collection from other banks via checks or wire transfers, loaning money to customers, processing credit card transactions, foreign currency exchange and the storing of valuable items in safe deposit boxes.
Banks make money primarily from collecting fees and making loans to customers. Different types of commercial bank accounts including checking, savings and trusts and each have separate fees associated with servicing of the accounts. Individuals use bank loans primarily for the purchase of a home, known as a mortgage but also for other purposes like small business loans. Larger businesses obtain loans for purposes including the financing of new plants and equipment.
The difference between the interest rate a bank pays depositors (for the use of their funds) and the rate they lend money to customers is called the ‘spread’ or net interest margin. The wider this margin is, the more profitable loans are for banks. Banks lend out the deposits but must keep an adequate amount of cash in ‘reserve’ to meet potential depositor withdrawals at all times. There are reserve requirements set by the government, which can be adjusted through monetary policy. If the Federal Reserve (Fed) wants more capital available in the system to help expand the economy it lowers the reserve requirement (allowing more money to be lent out for construction projects, home mortgages, small business loans, etc). Conversely, if it wants to slow down growth, it can raise the reserve requirement.
Commercial Banks are regulated on the state level and overseen on the Federal level by the Federal Deposit Insurance Corporation (FDIC). Customers rely on the banks to safeguard their deposits and accounts (at FDIC banks regulated banks, which most are) are insured up to $250,000 by the FDIC, which is backed by the full faith and credit of the United States. This amount has actually increased from $100,000 of coverage since the financial crisis, to engender more confidence in the financial system and the backstops in place.
There were a few notable bank failures from the financial crisis. The largest occurred when Seattle-based Washington Mutual’s $307 billion in assets were taken over or ‘assumed’ by JP Morgan Chase in 2008.4 To put this into context, during 2005, 2006 and 2007 there were just 3 total bank failures in the U.S. In 2010 alone, there were 157 failures.5 For an updated list of bank failures, FDIC keeps their “Failed Bank List.6
What are the Different Types of Commercial Banks?
Employees seemingly know everyone that walks into a community bank. Community banks take pride in focusing attention on local families and businesses and are deeply involved in their communities. They are independent, locally owned and operated. Community banks make loans to consumers, small businesses and the agricultural community while operating below the state level. Also, the members of their board of directors are often local citizens.
Community banks are found all over the country. They employ 700,000 Americans to service their 52,000 locations nationwide. They are typically smaller in size, with the majority under $250 million in assets. But with 52,000 locations, this adds up to $3.6 trillion in total assets.7 Their main competition for this market is credit unions.
Regional banks are mid-sized depository institutions that fall between community and larger money center banks. They operate within a region, or group of states, within the U.S. Prominent examples of regional banks are KeyBank headquartered in Cleveland, Ohio and Comerica in Dallas, Texas.
Bulge Bracket Banks
Bulge bracket banks, sometimes called money center banks, are large, multi-national banks. Due to their size, they often have a variety of divisions including commercial banking, investment banking and asset management all under one roof. Bulge bracket banks with commercial banking operations include JP Morgan Chase, Bank of America and Barclays.
What are the Different Careers in Commercial Banking?
Many people are needed to make a bank run smoothly. Here are some of the most common types of positions at a commercial bank.
Customer Service in Commercial Banking
This broad category includes all the employees who meet directly with customers on a daily basis, often at local branch offices. These include bank tellers, customer account specialists and administrative support staff. They assist customers with basic account transactions such opening accounts, making deposits, cashing checks, processing mortgage documents and dealing with ongoing inquiries and problems.
Branch Manager in Commercial Banking
Branch managers are the supervisors for the branches. They are responsible for making sure the branches run smoothly and are in compliance with banking rules and regulations. They create budgets, handle employee scheduling and training, sign-off on wire transfers and other supervisory decisions and help build the banks customer base.
Relationship Manager in Commercial Banking
The relationship manager markets various banking products to customers of the bank. Depending on the level of products the banker is licensed to provide, he may be considered a Bank Marketing Representative, Relationship Manager or Financial Advisor. These offerings may include special CDs or other investment instruments. This is the person that may call you if you have an unusually high balance in a low-yielding account such as checking and suggest you put it into a higher-yielding CD or certificate of deposit.
Loan Officer in Commercial Banking
Loan officers often solicit loans for the bank, meet with customers, ensure loan applications are filled out correctly and perform credit analysis on loan applicants. They may analyze credit reports for individuals or more complex financial statements for businesses.
The loans include traditional mortgage loans (fixed or variable interest rate) also include lines of credit (typically variable rate). If the loan officer is originating mortgages, he must have a Mortgage Loan Originator (MLO) license.
Stringent due diligence is important for a loan officer since a bank must keep non-performing (bad) loans at a minimum. These bad loans can stifle profitability and lead to bank insolvency if not constrained. Also, loan officers must monitor the ratio of fixed to floating rate loans to align with the banks strategic and risk management objectives.
What’s the Compensation at a Commercial Bank?
The compensation for commercial bankers isn’t as high as some of the other careers in finance. The nature of a bank is to keep costs low and this extends to compensation. According to the Bureau of Labor Statistics, the median compensation for a bank teller is $24,940.8 This may seem rather low but is probably due to the high rate of part-time employment for tellers – about 1 out of 3 tellers. The BLS also notes median pay for a branch manager is $57,081 and $71,386 for a loan officer.9 Payscale.com shows that Relationship Manager’s median pay is $66,790.10 Compensation continues to increase as you get into higher level bank management.
How do I Get Hired by a Commercial Bank?!
Commercial banking employment, while cyclical, isn’t overly rigorous. You’ll typically need a bachelor’s degree to become a bank manager, loan officer or any middle-management positions and higher and a Master’s degree in Finance or MBA is preferred. A relationship manager may need extra licenses such as the Series 7 or 6 if they offer investment or insurance products. For some customer service roles, including tellers, a high school diploma may be adequate because there will be extensive on the job training.
A career in commercial banking is a great way to help people reach their financial goals in life. Whether this is owning a home, starting a small business or simply building a playground for the community, commercial banking can be a very rewarding career option.