Financing Sources - What is the difference between a commercial bank and an investment bank?

Today the word bank is used broadly to cover a great range of financial institutions, including commercial banks and investment banks, merchant banks, so-called nonbank banks, and of course savings banks. What most ordinary citizens think of as a bank, however, remains the commercial bank—the bank that makes loans and lets customers make deposits that can be withdrawn on demand (demand deposits).

An investment bank is neither an investor nor a bank. It does not invest its own money, and it does not take deposited funds. Rather, an investment bank is an intermediary between saving and investing. An investment bank, in its broadest definition, is a financial institution that helps companies find the money they need to operate and/or grow. Although investment banks do not make loans directly, they can be a bridge to lending. Investment bankers may also serve as finders or brokers in locating and approaching company buyers or sellers.

The distinction between commercial banks and investment banks has been blurred ever since the repeal of the banking law known as Glass-Steagall. Although the Dodd-Frank Act of 2010 included a provision that banned proprietary trading and fund sponsorships by commercial banks, this “Volcker rule,” named after former Federal Reserve chair Paul Volcker, has been amended since passage, most recently in 2020.

As of late 2023, the distinction between commercial banks and investment banks remains blurred.

• Companies other than commercial banks (including industrial companies with no past financial experience) have made inroads into the services traditionally offered by commercial banks, such as loans. There are even nonbank banks, which may provide depositary services or make loans (but not both).
   
• Conversely, many commercial and investment banks have formed holding companies that own other kinds of financial institutions, broadening their scope of services.