Money Center Banks

The experience of most people with banks is at the retail level -- making deposits, writing checks, and perhaps taking consumer loans or small business loans.  These activities, while important to individuals, represent a minor part of the banking business.  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 been steadily decreasing due to mergers, but is still about five times greater than that in the U.K., the nation with the second largest number of banks.  Most of the assets of U.S. banks are concentrated in the larger banks.  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 means to have a global presence as well as heavy involvement in wholesale banking with clients comprising many retail banks and large corporations.  Citibank, J P Morgan Chase, and Bank of America fit this description. 

What Do They Do?

The activities of money market banks may be classified into four businesses:  portfolio business, corporate finance, trading, and distribution. Each of these will be described briefly.

Portfolio business is the activity of asset accumulation and funding in the interest of what is best for the bank. The bank acquires assets, securities or loans, which it can fund at 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.

Corporate finance is the business related to old-style lending, and is focused on what is best for the client, with the bank’s reward a fee for service.  The bank explores opportunities for the client:  a loan or a public offering like commercial paper, and assists the client in obtaining the required funds however they may be structured. 

Trading is a traditional part 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 make loans with the notion that they will sell off to investors, at a slight markup, participations in those loans.  This activity also helps support their corporate finance activity. .

Distribution involves the sale of its own paper and exempt securities -- treasuries, agencies, general obligation munis, BAs, Euro CDs, and other money market paper -- that banks 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. 

This overview provides but a brief glimpse into the activities and importance of the money center banks.  Further detail can be found in the article on The Money Market.