|Money Center Banks
The experience of
most people with
banks is at the retail level -- making deposits, writing checks, and
taking consumer loans or small business loans. These activities,
while important to individuals, represent a minor part of the banking
For an understanding of the major role that banks play in the economy,
we need to look at the activities of truly large banks.
What is a Money Center Bank?
The U.S. is unique among the nations in terms of the
number of commercial
banks in operation, 7,660 as of September 2004. This number has
steadily decreasing due to mergers, but is still about five times
than that in the U.K., the nation with the second largest number of
Most of the assets of U.S. banks are concentrated in the larger
The ten largest now hold almost half the total of bank assets.
The nation’s largest
banks are often
referred to as money market banks or money center banks. In
addition to the traditional markets, to be a money center bank today
to have a global presence as well as heavy involvement in wholesale
with clients comprising many retail banks and large corporations.
Citibank, J P Morgan Chase, and Bank of America fit this
What Do They
The activities of
money market banks
may be classified into four businesses: portfolio business,
finance, trading, and distribution. Each of these will be described
is the activity
of asset accumulation and funding in the interest of what is best for
bank. The bank acquires assets, securities or loans, which it can fund
a spread over its cost of money. It seeks to enhance that spread
by mismatching its maturities when rates and its view of rates indicate
that it is likely to be profitable.
is the business
related to old-style lending, and is focused on what is best for the
with the bank’s reward a fee for service. The bank explores
for the client: a loan or a public offering like commercial
and assists the client in obtaining the required funds however they may
Trading is a
of banking, but is now more for market making and liquidity than in the
past. A strategy of money center banks today is to aggressively
loans with the notion that they will sell off to investors, at a slight
markup, participations in those loans. This activity also helps
their corporate finance activity. .
involves the sale
of its own paper and exempt securities -- treasuries, agencies, general
obligation munis, BAs, Euro CDs, and other money market paper -- that
are permitted to trade. Today those sales have been extended into
participations in bank loans and commercial paper. A substantial
sales force with special skills is required in this activity.
provides but a brief
glimpse into the activities and importance of the money center
Further detail can be found in the article on The