Money Games

AppendixA Primer on Commercial Banking

To follow the story of this book, it is useful to be familiar with the basics of commercial banking, or how banks operate. This primer covers the major concepts and terminology of commercial banking. A reader can flip back to this primer as a reference for some key banking concepts and terminologies discussed in the book. For the convenience of the reader, I use italics to highlight the key terms below.

By banks mentioned in this primer and elsewhere in the book, I am generally referring to commercial banks, whose business is mainly to collect deposits and make loans. Investment banks are a different type; they generally function, for a fee, as intermediaries between sources and uses of capital, such as when they arrange for a company to sell its stocks or bonds in the public market.

Some banks do both investment and commercial banking; others specialize in one or the other. In the United States, banks used to be able to do both, but they were required to choose one or the other by the Glass-Steagall Act, a law passed in 1933 in the wake of the Great Depression during which thousands of banks had failed. The act prohibited commercial banks from engaging in the investment banking business. For example, the old and venerated JP Morgan, also known as the House of Morgan, was separated into JP Morgan, which became a commercial bank, and Morgan Stanley, which operated as an investment bank. By the time I went to work for JP Morgan in 1993, ...