Merchant bank

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A merchant bank is historically a bank dealing in commercial loans and investment. In modern British usage it is the same as an

investment bank. Merchant banks were the first modern banks and evolved from medieval merchants who traded in commodities, particularly cloth merchants
. Historically, merchant banks' purpose was to facilitate and/or finance production and trade of commodities, hence the name "merchant". Few banks today restrict their activities to such a narrow scope.

In modern usage in the United States, the term additionally has taken on a more narrow meaning, and refers to a financial institution providing capital to companies in the form of share ownership instead of loans. A merchant bank also provides advice on corporate matters to the firms in which they invest.

History

Main article: History of banking

Merchant banks were the first modern banks. They emerged in the

Commercial Revolution.[1]

Jews entered the great trading

future contract
market in modern finance.

The

crop failure
, through the issuance of a crop (or commodity) insurance against the hazard of failure of his crop.

Merchant banking progressed from financing trade on one's own behalf to settling trades for others and then to holding deposits for settlement of "billette" or notes written by the people who were still brokering the actual grain. And so the merchant's "benches" (bank is derived from the Italian for bench, banco, as in a

bill of exchange and later still a cheque
).

These deposited funds were intended to be held for the settlement of grain trades, but often were used for the bench's own trades in the meantime. The term

bankrupt
is a corruption of the Italian banca rotta, or broken bench, which is what happened when someone lost his traders' deposits. Being "broke" has the same connotation.

A sensible manner of discounting interest to the depositors against what could be earned by employing their money in the trade of the bench soon developed; in short, selling an "interest" to them in a specific trade, thus overcoming the usury objection. Once again this merely developed what was an ancient method of financing long-distance transport of goods.

The medieval Italian markets were disrupted by wars and in any case were limited by the fractured nature of the Italian states. And so the next generation of bankers arose from migrant Jewish merchants in the great wheat-growing areas of Germany and Poland. Many of these merchants were from the same families who had been part of the development of the banking process in Italy. They also had links with family members who had, centuries before, fled Spain for both Italy and England. As non-agricultural wealth expanded, many families of

Warburgs and Rothschilds
.

Johann Hinrich Gossler, a prominent Hamburg merchant banker of the 18th century

The rise of

loans. For instance, bullion trading and bond issuance were two of the specialties of the Rothschilds. In 1803, Barings teamed with Hope & Co. to facilitate the Louisiana Purchase
.

In the 19th century, the rise of trade and industry in the US led to powerful new private merchant banks, culminating in J.P. Morgan & Co. During the 20th century, however, the financial world began to outgrow the resources of family-owned and other forms of private-equity banking. Corporations came to dominate the banking business. For the same reasons, merchant banking activities became just one area of interest for modern banks.

Here is a list of merchant banks of the past and present:

Modern practices

Known as "accepting and issuing houses" in the UK and "investment banks" in the US, modern merchant banks offer a wide range of activities: issue management, portfolio management, credit syndication, acceptance credit, counsel on mergers and acquisitions, insurance, etc.

Of the two classes of merchant banks, the US variant initiates loans and then sells them to investors.

investment firms
. Even though some of these companies call themselves "merchant banks", they have few, if any, of the characteristics of former merchant banks.

Usage in the United States

Today, according to the US

investment banks
may engage in merchant banking activities.

See also

  • Commercial bank
  • Investment bank
  • List of finance topics
  • List of international trade topics

References

  1. ISBN 9782700305012
    .
  2. ISBN 0-7641-1260-0
  3. ^ "Merchant Banking: Past and Present". Archived from the original on 2008-02-14. Retrieved 2008-01-28.

Further reading

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