Money Center Banks

A money center bank is similar in structure to a common bank; however, its borrowing and lending activities are with governments, large corporations, and regular banks. These types of financial institutions (or designated branches of these institutions) generally do not borrow from or lend to consumers.

Money center banks are usually located in major economic centers such as London, Hong Kong, Tokyo and New York. With their large balance sheets, these banks are involved in national and international financial systems.

Four examples of large money center banks in the United States include: Bank of America, Citi, JP Morgan, and Wells Fargo, among others. During the 2008 financial crisis these banks struggled financially; however, the U.S. Federal Reserve stepped in with three phases of quantitative easing (QE) and bought back mortgages.

In 2004, U.S. homeownership peaked at 70%; during the last quarter of 2005, home prices started to fall, which led to a 40% decline in the U.S. Home Construction Index during 2006. At this point subprime borrowers were not able to withstand the higher interest rates and began defaulting on their loans. In 2007, multiple subprime lenders were filing for bankruptcy. This had a ripple effect throughout the entire U.S. financial services industry--of course hitting many money center banks hard.

During the period of QE, these financial institutions had a steady stream of cash, with which they were able to originate new mortgages and loans, supporting overall economic recovery.

Once the QE programs ceased, many were concerned that money center banks would not be able to grow organically without support. This is due to the fact that the banks' primary sources of income were loan and mortgage interest charges. However, U.S. interest rates did begin to rise, and with them, money center banks’ net interest income also rose.

Most money center banks raise funds from domestic and international money marks (as opposed to relying on depositors, like traditional banks). The dividend yields of these institutions are enviable for some, who like to collect such securities for the purposes of income.

The formula for calculating dividend yield is as follows:

Estimated current year yields often use the previous year’s dividend yield or take the latest quarterly yield, and then multiply this by 4 (adjusting for seasonality) and divide it by the current share price.