Commercial banks accept deposits into checking and savings accounts. They use these deposits to make business, personal, and auto loans, as well as issue credit cards and mortgages. These banks also borrow money in the Commercial Paper Market and lend this out at higher rates. Commercial paper is short-term loans, secured by promissory notes (essentially I.O.Us), with terms typically 30 to 180 days.
There is a huge market for borrowing via commercial paper from banks. The current outstanding amount of commercial paper in the U.S. is about $1.1 trillion. With an average term length of 30 days, banks must reborrow the money every 30 days.
Commercial banks receive a charter from the Federal Reserve Bank that gives them permission to operate. However, they must follow the rules of the Fed and remain solvent. The Fed audits commercial banks regularly and can revoke a charter if a bank is insolvent or engages in prohibited behavior. All deposits in commercial banks are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per account. The FDIC is a government-sponsored insurance company that charges premiums to commercial banks. If a bank becomes insolvent, the FDIC will usually sweep in on a Friday after close of business, seize the bank, fire the officers, and immediately call the customers to let them know their deposits are insured and therefore safe. Usually, the FDIC will then sell the assets to a solvent bank.