What Are Money Center Banks?
Let me explain what money center banks are. They're structured much like your standard bank, but their borrowing and lending focus on governments, large corporations, and other banks. These institutions, or their specific branches, typically don't deal with consumer borrowing or lending.
Key Takeaways on Money Center Banks
To break it down simply, a money center bank mirrors a regular bank in setup, but it handles borrowing and lending with governments, big companies, and fellow banks. In the U.S., think of giants like Bank of America, Citi, JP Morgan, and Wells Fargo as prime examples. Unlike traditional banks that rely on depositors, most money center banks source their funds from domestic and international money markets.
Understanding Money Center Banks
You'll find money center banks in key economic hubs such as London, Hong Kong, Tokyo, and New York. With their massive balance sheets, they play integral roles in both national and international financial systems.
Money Center Banks and the 2008 Financial Crisis
Consider the big U.S. players again: Bank of America, Citi, JP Morgan, and Wells Fargo. These banks hit rough waters during the 2008 financial crisis, but the U.S. Federal Reserve intervened with three phases of quantitative easing, including mortgage buybacks.
Back in 2004, U.S. homeownership reached a high of 70%, but by late 2005, home prices began dropping, causing a 40% plunge in the U.S. Home Construction Index in 2006. Subprime borrowers couldn't handle rising interest rates and started defaulting. By 2007, several subprime lenders went bankrupt, sending shockwaves through the financial sector and hammering money center banks.
Through QE, these banks got a reliable cash flow, allowing them to issue new mortgages and loans that bolstered economic recovery. When QE ended, there were worries about organic growth since their main income comes from loan and mortgage interest. But as U.S. interest rates climbed, so did their net interest income.
Money Center Banks and Dividend Income
As I mentioned, money center banks pull funds from domestic and international money markets, not depositors like traditional banks do. For investors seeking income, the dividend yields from these banks can be quite appealing.
Here's the formula for dividend yield: it's annual dividends per share divided by price per share.
When estimating current year yields, we often use the prior year's dividend yield or take the latest quarterly yield, multiply by four with seasonal adjustments, and divide by the current share price.
We also annualize quarterly returns for better comparisons. For instance, if a stock or bond returns 5% in the first quarter, multiply by four quarters to get a 20% annualized return.
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