In a banking interview, which statement best describes the core business model of a typical commercial bank?

Introduction / Context:
In many accounting and finance interviews, candidates are asked to explain the business model of a bank, often framed as the employer saying "Explain our business model." This question checks whether the candidate understands how a commercial bank actually earns money, what services it provides and how it manages key risks. A clear and concise description of the bank business model is essential for roles in corporate finance, treasury, risk management and financial analysis.

Given Data / Assumptions:

• The focus is on a typical commercial or universal bank, not on specialised investment funds or insurance companies.
• The bank accepts deposits from individuals, businesses and other institutions.
• The bank uses those deposits and other funding sources to make loans and investments.
• The bank earns income from interest spread and various fees, while following regulation and managing risk.

Concept / Approach:
A simple way to think about the commercial bank business model is that the bank is an intermediary between savers and borrowers. It collects funds in the form of deposits and sometimes wholesale borrowing. It then lends those funds out as loans such as mortgages, business loans and personal loans, and invests in approved securities. The bank earns a net interest margin, which is the difference between interest received on loans and investments and interest paid on deposits and borrowings. In addition, it charges fees on services such as payments, credit cards and advisory work. The model only works if the bank manages credit risk, interest rate risk and liquidity risk in a disciplined way.

Step-by-Step Solution:
Step 1: Identify the main sources of bank funding, which are customer deposits and sometimes market borrowings. Step 2: Identify the main uses of funds, which are loans to households and businesses and investments in securities permitted by regulation. Step 3: Recognise that the bank charges higher interest on loans than it pays on deposits, creating an interest spread that is a key income source. Step 4: Add fee based income from services such as transfers, cards and trade finance to complete the income picture. Step 5: Confirm that the chosen description mentions both intermediation and risk management, because the bank must remain liquid and solvent while performing this role.

Verification / Alternative check:
To verify, imagine a simple bank balance sheet. On the liability side there are deposits from customers and some equity capital. On the asset side there are loans and approved investments. The bank earns interest on the asset side and pays interest on some liabilities. The difference, after operating costs and provisions, is profit. In addition, the bank charges fees on services like remittances and account maintenance. This picture matches the idea that the core business is to accept deposits, extend credit and provide related financial services, not to print money or collect taxes. That confirms the accuracy of the correct option.

Why Other Options Are Wrong:
Option B is wrong because only the central bank is responsible for issuing currency, while commercial banks distribute cash but do not print it. Option C is incorrect because tax collection is a function of the government and its agencies, not the main business model of a commercial bank. Option D describes an insurance company, not a universal bank that deals with deposits and loans. Option E exaggerates risk and ignores regulation; commercial banks cannot legally invest all money in speculative shares and must maintain reserves and liquidity to protect depositors.

Common Pitfalls:
A common pitfall is to answer very vaguely by saying that a bank "does financial services" without mentioning deposits, loans and interest spread. Another mistake is to confuse the roles of commercial banks, investment banks and insurance companies, mixing features of each. Some candidates also forget to mention that managing risk and complying with regulation is part of the business model, not an external burden. A good explanation briefly covers funding sources, lending and investment activities, income streams and risk management.

Final Answer:
A commercial bank mainly accepts deposits from customers and lends those funds to households and businesses, earning interest spread and fee income while managing risk and liquidity.