You may be familiar with money center banks because they are large, well-known banks. These five major banks are examples of money center banks:
Bank of New York MellonDeutsche BankCitigroupJ. P. Morgan ChaseHSBC Bank USA (formerly Republic NY Corporation)
Money center banks tend to pursue international banking business and maintain a significant amount of international assets. They are less determined by their asset or lending size than they are by how they do business and earn profits. Most often, money center banks are headquartered in large metropolitan areas like Chicago or New York City, but they can have branches elsewhere. Generally, they act as national and regional centers for the correspondent banking services offered to smaller community banks. Money center banks exist internationally. Those that specialize in trading transactions tend to be located in major European financial centers such as Paris, London, Brussels, Amsterdam, Vienna, Zurich, Geneva, Liechtenstein, and Luxembourg.
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.
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.
