What is a Money Center Bank?

What is a Money Center Bank?

A money center bank is similar in structure to a standard bank; however, it’s 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.

A money center bank is similar in structure to a standard bank; however, it’s borrowing, and lending activities are with governments, large corporations, and regular banks.

Four examples of large money center banks in the United States include Bank of America, Citi, JP Morgan, and Wells Fargo, among others.

How Do Money Center Banks Work?

Money center banks often participate in the secondary market trading of government securities, acting as primary dealers.

It’s common for money center banks to access more of their liquid funds from the borrowed funds markets than core deposit markets. That can make them more vulnerable to liquidity risks than banks that rely more on core deposits for liquid funds.

Money center banks are authorized to issue blocks of debt instruments, such as:

  • Bank purchase orders: Purchase orders are used to help a company continue its operations and pay its suppliers to meet customer demands during times of tight cash flow.
  • Promissory bank notes: A promissory note, which can be issued by a bank, outlines a “promise to pay” agreement regarding borrowed money.
  • Medium-term notes: In contrast to short- or long-term notes, medium-term notes have a medium-term length, usually about five to 10 years.
  • Zero coupon bonds: Zero coupon bonds do not pay interest to the bondholder. Instead, they are sold at a discount for the bondholder to profit when the bond matures, or becomes due.
  • Documentary or commercial letters of credit: Letters of credit help buyers and sellers reduce their risk with payment and deliveries. Commercial (or documentary) letters of credit are used in international trade.
  • Standby letters of credit: Standby letters of credit are a type of guarantee that the holder will be repaid in the event of something going wrong or failing to happen.
  • Bank debenture instruments: Debentures are issued to investors without the backing of collateral. Instead, they are backed by the creditworthiness and reputation of the issuer.
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To manage intraday cash flow, money center banks trade federal funds among themselves. For example, if a money center bank issues a homebuyer a mortgage loan, that money center bank then makes a large payment to the seller’s bank on the buyer’s closing day. If the buyer’s money center bank doesn’t have adequate reserves at that moment, it can raise them in the money market.

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 liquidity 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 paper, and acquisition financing for corporate, government, and institutional clients, and help them to secure the funds.

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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.