Money Center Banks: Definition, Overview, & Their Economic Role

What Are Money Center Banks?

Money center banks are financial institutions that primarily engage in borrowing and lending with large entities like governments, large corporations, and other banks, rather than individual consumers. Located in major economic hubs such as London, Hong Kong, Tokyo, and New York, these banks play a crucial role in the global financial system. Money center banks are pivotal in managing significant capital flows and supporting economic stability. In this guide, you'll learn about their structure, roles, and how they differ from traditional banks.

How Money Center Banks Operate in the Financial System

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.

Role of Money Center Banks in the 2008 Financial Crisis

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 because 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.

Understanding Dividend Income from Money Center Banks

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 income.

The formula for calculating dividend yield is as follows:

 $\displaystyle{=\ \frac{\text{Annual Dividends Per Share}}{\text{Price Per Share}}}$= Price Per ShareAnnual Dividends Per Share​

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

Quarterly rates of return are often annualized for comparative purposes. A stock or bond might return 5% in Q1. We could annualize the return by multiplying 5% by the number of periods or quarters in a year. The investment would have an annualized return of 20% because there are four quarters in one year or (5% * 4 = 20%).