Money Center Banks: Definition, Services & Key Players

A money center bank is a bank that is located in major cities like London, New York, and Hong Kong. It covers regions, countries, and continents, providing a wide range of financial services. Its revenue primarily comes from transactions with large corporations, other retail banksRetail Bank TypesBroadly speaking, there are three main retail bank types. They are commercial banks, credit unions, and certain investment funds that offer retail banking services. All three work toward providing similar banking services. These include checking accounts, savings accounts, mortgages, debit cards, credit cards, and personal loans., and governments. They are also known as money market banks.

Money center banks operate in economic hubs and are considered universal banks. These are involved in almost everything related to banking, ranging from the issuance of credit cards to capital markets and even assisting firms to sell stocks in the initial public offerings (IPOs)Initial Public Offering (IPO)An Initial Public Offering (IPO) is the first sale of stocks issued by a company to the public. Prior to an IPO, a company is considered a private company, usually with a small number of investors (founders, friends, family, and business investors such as venture capitalists or angel investors). Learn what an IPO is.

The banks influence business practices and interest rates of smaller banks; hence, a money center bank is considered a leader, at least within a region.

Summary

• Money center banks are large banks situated in economic hubs. They primarily deal with governments, other banks, and big corporations.
• They operate globally and are involved in everything associated with banking.
• The banks make money from money markets – both domestic and international.

Activities of Money Center Banks

The operations of a money center bank can be classified into the following businesses:

Portfolio business

A money center bank accumulates assets and provides funds focusing on the interest of the bank. They buy securities and assets, which can increase the spread between the rate of interest charged by the banks and the cost of funds.

The bank spread is one of the primary means of profits for banks. To further enhance the spread, banks borrow short-term and lend long-term at higher interest rates.

Trading

Trading’s always been a component of banking. However, it is largely for liquidityLiquidityIn financial markets, liquidity refers to how quickly an investment can be sold without negatively impacting its price. The more liquid an investment is, the more quickly it can be sold (and vice versa), and the easier it is to sell it for fair value. All else being equal, more liquid assets trade at a premium and illiquid assets trade at a discount. and market-making. Money center banks trade in the markets from both the buy and sell sides. They make money by selling at prices higher than market prices.

The banks provide loans aggressively with the belief that they will be selling off to investors, the participants in the loans, at slightly higher prices. The business activity supports the corporate finance division of banks.

Corporate finance

The corporate finance division acts on the interest of clients where the bank receives a fee for the services provided.

Money center banks look over opportunities, such as loans and other credit products, short-term debts like commercial paperCommercial PaperA commercial paper refers to a short-term, unsecured debt obligation issued by financial institutions and large corporations in place of costlier methods of funding., and acquisition financing for corporate, government, and institutional clients, and help them to secure the funds.

Distribution

Distribution deals with the selling of the bank’s securities, such as treasuries, BAs (banker’s acceptances), and similar money market instruments. It involves securities that the bank is allowed to trade. Money center banks are currently allowed to sell commercial papers and participate in bank loans.

Money Center Banks in the U.S.

Based on asset size, JP Morgan, Bank of America, Citigroup, and Wells Fargo are the big four money center banks in the U.S. The four banks hold approximately 45 percent of the deposits in the country, serving a considerable portion of business and personal account holders.

The banks can be considered too large to collapse. However, during the 2008 financial crisis, even these banks struggled financially. In 2007, bankruptcy filing by many low credit lenders caused a ripple effect in the U.S. and resulted in a massive and negative impact even on the large money center banks.

The U.S. Federal Reserve started buying back MBS (mortgage-backed securitiesMortgage-Backed Security (MBS)A Mortgage-backed Security (MBS) is a debt security that is collateralized by a mortgage or a collection of mortgages. An MBS is an asset-backed security that is traded on the secondary market, and that enables investors to profit from the mortgage business) from banks as part of three mortgage buying phases known as quantitative easing (QE). The move resulted in steady money flow into the banks, enabling them to create more loans and mortgages and supporting the recovery of the overall economy, including themselves.

The main source of income for banks was the interest charged on mortgages and loans. Hence, at the end of the QE plan, many worried that the money center banks would face difficulties in their growth.

Interest rates, however, began to rise in the U.S., and money center banks started making more and more profits. Since 2009, they’ve accumulated over $1 trillion in capital, $2 trillion in cash, and more than $3 trillion in deposits.

Additional Resources

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• Federal Reserve (The Fed)Federal Reserve (The Fed)The Federal Reserve is the central bank of the United States and is the financial authority behind the world’s largest free market economy.
• 2008-2009 Global Financial Crisis2008-2009 Global Financial CrisisThe Global Financial Crisis of 2008-2009 refers to the massive financial crisis the world faced from 2008 to 2009. The financial crisis took its toll on individuals and institutions around the globe, with millions of American being deeply impacted. Financial institutions started to sink, many were absorbed by larger entities, and the US Government was forced to offer bailouts
• Quantitative EasingQuantitative EasingQuantitative easing (QE) is a monetary policy of printing money, that is implemented by the Central Bank to energize the economy. The Central Bank creates
• JP Morgan Chase & CoJP Morgan Chase & CoJPMorgan Chase & Co is a multinational bank holding company that is headquartered in New York City. It became one of the top banks in the US after the merger of J.P. Morgan and Chase Manhattan Bank in December 2000. Globally, JPMorgan Chase and Co. is the sixth largest bank by assets in the world, with total assets