# Money Center Banks: Meaning, Overview, Role in Economy

## What Are Money Center Banks?

A money center bank is similar in structure to a standard bank; however, it's borrowing, and lending activities are with governments, large [corporations](https://www.investopedia.com/terms/c/corporation.asp), and regular banks. These types of financial institutions (or designated branches of these institutions) generally do not borrow from or lend to consumers.

### Key Takeaways

*   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.
*   Most money center banks raise funds from domestic and international money marks (as opposed to relying on depositors, like traditional banks).

## Understanding Money Center Banks

Money center banks are usually located in major economic centers such as London, Hong Kong, Tokyo, and New York. With their large [balance sheets](https://www.investopedia.com/terms/b/balancesheet.asp), these banks are involved in national, and international [financial systems](https://www.investopedia.com/terms/f/financial-system.asp).

## Money Center Banks and 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](https://www.investopedia.com/articles/economics/09/financial-crisis-review.asp), these banks struggled financially; however, the U.S. Federal Reserve stepped in with three phases of [quantitative easing](https://www.investopedia.com/terms/q/quantitative-easing.asp) (QE) and bought back [mortgages](https://www.investopedia.com/terms/m/mortgage.asp).

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](https://www.investopedia.com/terms/s/subprimelender.asp) were filing for [bankruptcy](https://www.investopedia.com/terms/b/bankruptcy.asp). 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](https://www.investopedia.com/terms/i/interestrate.asp) did begin to rise, and with them, money center banks’ [net interest income](https://www.investopedia.com/terms/n/net-interest-income.asp) also rose.

## Money Center Banks and Dividend Income

Most money center banks raise funds from domestic and international money marks (as opposed to relying on depositors, like traditional banks). The [dividend yields](https://www.investopedia.com/terms/d/dividendyield.asp) of these institutions are enviable for some, who like to collect such securities for income.

The formula for calculating dividend yield is as follows:

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

Estimated current year yields often use the previous year’s dividend yield or take the latest [quarterly](https://www.investopedia.com/terms/q/quarter.asp) yield, and then multiply this by four (adjusting for [seasonality](https://www.investopedia.com/terms/s/seasonality.asp)) 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](https://www.investopedia.com/terms/a/annualize.asp) of 20% because there are four quarters in one year or (5% \* 4 = 20%).