The 4 types of banks in the United States are commercial banks, investment banks, central banks, and credit unions. Commercial banks handle everyday deposits and loans for individuals and businesses. Investment banks help companies and governments raise money in the capital markets. The central bank, which in the U.S. is the Federal Reserve, manages the money supply and supervises the banking system. Credit unions do much of what commercial banks do but are nonprofit cooperatives owned by their members. A couple of related institutions — thrifts and online-only providers — sit alongside these four and are worth knowing about if you’re choosing where to keep your money.
Commercial Banks
Commercial banks are the institutions most people picture when they think of banking. They take deposits, issue debit cards, process checks, and make loans ranging from home mortgages to small business credit lines. They are for-profit companies owned by stockholders. National banks are chartered under the National Bank Act, codified at 12 U.S.C. § 38.1Office of the Law Revision Counsel. 12 USC 38 – The National Bank Act
National banks and federal savings associations are examined, supervised, and regulated by the Office of the Comptroller of the Currency.2eCFR. 12 CFR Part 4 Subpart A – Organization and Functions Deposits are insured up to $250,000 per depositor, per insured bank, for each ownership category through the FDIC.3FDIC.gov. Deposit Insurance At A Glance Because each ownership category is insured separately, a married couple with joint and individual accounts at the same bank can be covered well beyond $250,000 in total.
The business model is simple. A commercial bank pays depositors a low interest rate on savings and lends that money out at higher rates for mortgages, auto loans, and business credit. The gap between those rates — the interest rate spread — produces most of the bank’s revenue. Fees fill in the rest: account maintenance, overdrafts, wire transfers. Monthly maintenance fees on checking accounts commonly run $4 to $25, though many banks waive them if you keep a minimum balance or set up direct deposit.
Common Account Types
Commercial banks offer several deposit products that trade off access against earning potential:
- Checking accounts are built for frequent transactions through debit cards, checks, and online transfers. They pay little or no interest.
- Savings accounts are meant for accumulating funds over time at modest interest, historically with some limits on monthly withdrawals.
- Money market accounts pay variable interest that moves with market conditions, often tiered by balance, while keeping funds reasonably accessible.
- Certificates of deposit lock your money for a fixed term, from a few months to several years, at a guaranteed rate. Early withdrawal triggers a penalty.
The more flexibility you want, the less interest you earn. CDs pay the most precisely because you agree not to touch the money.
Investment Banks
Investment banks operate in a different world from the retail branch on your corner. They don’t take consumer deposits or offer checking accounts. Their clients are corporations, governments, and institutional investors, and their work is large-scale financial transactions: raising capital, advising on mergers, and trading securities.
The most visible function is underwriting. When a company goes public through an initial public offering, the investment bank helps prepare the registration paperwork for the Securities and Exchange Commission, buys the newly issued shares from the company, and resells them to the investing public. The bank’s profit is the underwriting spread, the difference between what it pays the company and what it sells at. Based on public filing data from over 1,300 companies, that spread averages 4% to 7% of gross IPO proceeds. On a $500 million offering, that is $20 million to $35 million in fees.
Beyond underwriting, investment banks advise companies on mergers, acquisitions, and restructurings. They work out valuations, negotiate deal terms, and structure financing. Advisory work generates substantial fees and builds the relationships that lead to future capital raises.
The dividing line between commercial and investment banking used to be absolute. The Glass-Steagall Act of 1933 prohibited affiliations between the two. The Gramm-Leach-Bliley Act repealed those restrictions in 1999 and allowed financial holding companies to engage in activities “financial in nature,” including securities underwriting and insurance.4Office of the Law Revision Counsel. 12 USC 1843 – Interests in Nonbanking Organizations Today, the largest bank holding companies often house commercial and investment banking arms under one corporate umbrella.
Central Banks
A central bank doesn’t serve individual customers. It serves the banking system itself, and through it, the broader economy. In the United States, that institution is the Federal Reserve, established by the Federal Reserve Act of 1913.5Office of the Law Revision Counsel. 12 USC 226 – Federal Reserve Act The Fed has three jobs that affect everyday life even for people who never interact with it: managing the money supply, supervising banks, and acting as the lender of last resort when financial institutions face a liquidity crisis.
The Dual Mandate
Congress directed the Federal Reserve to pursue two primary objectives: maximum employment and stable prices.6Office of the Law Revision Counsel. 12 USC 225a – Maintenance of Long Run Growth of Monetary and Credit Aggregates This is the dual mandate. In practice, the Fed interprets stable prices as an inflation rate of about 2% per year, measured by the personal consumption expenditures price index.7Board of Governors of the Federal Reserve System. What Economic Goals Does the Federal Reserve Seek to Achieve Through Its Monetary Policy The two goals can pull in opposite directions. Pushing unemployment down can fuel inflation, and fighting inflation can slow job growth, so the Fed is constantly balancing competing pressures.
How the Fed Reaches You
The Fed’s primary tool is the federal funds rate, the target interest rate at which banks lend to each other overnight. When that rate goes up, borrowing becomes more expensive throughout the economy; when it comes down, credit gets cheaper. The effects ripple outward. Credit card rates and adjustable-rate mortgages respond fairly quickly. Fixed-rate 30-year mortgages are less directly affected because they track longer-term bond yields.
The Fed also operates a discount window, where it makes short-term advances to member banks secured by Treasury securities or other eligible collateral.8Office of the Law Revision Counsel. 12 USC 347 – Advances to Member Banks on Their Notes The discount rate typically sits above the federal funds rate, pushing banks to borrow from each other first and turn to the Fed only as a backstop. That lender-of-last-resort function is what keeps one bank’s liquidity problem from cascading into a system-wide crisis.
Credit Unions
From the outside, a credit union looks a lot like a commercial bank. Checking accounts, savings accounts, auto loans, mortgages. The difference is ownership and purpose. A credit union is a nonprofit cooperative in which every depositor is a member and part-owner. There are no outside stockholders expecting profits. The legal foundation is the Federal Credit Union Act, codified at 12 U.S.C. § 1751.9Office of the Law Revision Counsel. 12 USC 1751 – Short Title
Membership Requirements
You can’t just walk into any credit union and open an account. Federal law requires members to share a “common bond,” and the National Credit Union Administration recognizes three types:10eCFR. Appendix B to Part 701, Title 12 – Chartering and Field of Membership Manual
- Occupational: members work for the same employer or in the same trade or industry.
- Associational: members belong to the same recognized organization, such as a church, alumni group, or professional association.
- Community: members live, work, worship, or attend school in the same well-defined local area.
Community charters have made credit unions much more accessible than they used to be. Many now define their communities broadly enough that most people in a given metro area qualify.
Rates, Taxes, and Insurance
Credit unions organized without capital stock and operated for mutual purposes are exempt from federal income tax under 26 U.S.C. § 501(c)(14).11Office of the Law Revision Counsel. 26 USC 501 – Exemption From Tax on Corporations, Certain Trusts, Etc. That tax status, combined with the absence of shareholder profit expectations, is why credit unions frequently offer lower interest rates on loans and higher yields on savings than commercial banks. The spread is not always dramatic, but on a mortgage or auto loan, even a quarter-point difference adds up.
Deposits are protected by the National Credit Union Share Insurance Fund, which provides up to $250,000 of federal insurance per account holder, the same level of protection as FDIC coverage at commercial banks.12National Credit Union Administration. Share Insurance Coverage The NCUA administers that fund and also serves as the primary federal regulator for credit unions, chartering new ones and examining existing ones for financial soundness. Members participate in governance by electing a volunteer board of directors, with one vote per member regardless of deposit size.
Related Institutions You May Already Be Using
Two other categories don’t quite fit the four main types but come up often enough to be worth knowing. One is a traditional institution with a specific focus. The other is a newer category where deposit protection isn’t automatic.
Savings and Loan Associations
Savings and loan associations, also called thrifts, were originally created to channel household savings into residential mortgage lending. They’re chartered under the Home Owners’ Loan Act of 1933.13Office of the Law Revision Counsel. 12 USC 1461 – Short Title Thrifts now offer many of the same products as commercial banks, including checking accounts, personal loans, and credit cards, but federal law still requires them to keep a heavy focus on housing. Under the Qualified Thrift Lender test, at least 65% of a savings association’s portfolio assets must be in housing-related investments.14Office of the Law Revision Counsel. 12 USC 1467a – Regulation of Holding Companies Thrifts that fail this test lose certain tax benefits and face operating restrictions. Like national banks, federal savings associations are supervised by the OCC and their deposits carry FDIC insurance.
Online Banks and Neobanks
Online banks run without physical branches and pass the cost savings along as higher deposit rates and lower fees. Many hold their own bank charters and carry FDIC insurance directly, which makes them functionally equivalent to a commercial bank you’d find on any main street.
Neobanks are different. These fintech companies offer banking-like services through mobile apps but typically do not hold a bank charter themselves. They partner with a chartered bank that actually holds your deposits. That distinction matters. The FDIC is clear that nonbank companies themselves are never FDIC-insured. Funds you send to a neobank aren’t eligible for federal insurance until the company deposits them at an insured bank, and even then, the partner bank must keep proper records identifying each depositor and the amount they own.15FDIC. Banking With Third-Party Apps If the neobank itself goes bankrupt, as opposed to the partner bank failing, FDIC insurance doesn’t apply at all. Recovery in that scenario would run through a bankruptcy proceeding, which can take months or longer. Before trusting a neobank with significant deposits, find out which specific FDIC-insured bank is behind it and confirm its status using the FDIC’s BankFind tool.