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 or finance the production and trade of commodities, hence the name merchant. Few banks today restrict their activities to such a narrow scope.[1][2]
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 form of share ownership instead of loans. A merchant bank also provides advice on corporate matters to the firms in which they invest.
History
Merchant banks were the first modern banks. They emerged in the Middle Ages from the Italian grain and cloth merchants community and started to develop in the 11th century during the large European fair of St. Giles (England), then at the Champagne fairs (France). As the Lombardy merchants and bankers grew in stature based on the strength of the Lombard plains cereal crops, many displaced Jews fleeing Spanish persecution were attracted to the trade.[3]
The Florentine merchant banking community was exceptionally active and propagated new finance practices all over Europe. Both Jews and Florentine merchants perfected ancient practices used in the Middle East trade routes and the Far East silk routes. Originally intended for the finance of long trading journeys, these methods were applied to finance the medieval Commercial Revolution.[4]
Jews entered the great trading piazzas and halls of Lombardy, alongside the local traders, and set up their benches to trade in crops. They had one great advantage over the locals. Christians were strictly forbidden from any kind of lending at interest, since such activities were equated with the sin of usury. Jewish law disallowed usury among Jews, but not when the borrower was Gentile.
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, including Issue management, portfolio management, credit syndication, acceptance credit, counsel on mergers and acquisitions, and insurance.[5]
Of the two classes of merchant banks, the US variant initiates loans and then sells them to investors.[6] These investors can be private investment firms. Even though some of these companies call themselves "merchant banks", they have few, if any, of the characteristics of former merchant banks.[7]
Usage in the United States
Today, according to the US Federal Deposit Insurance Corporation (FDIC), "the term merchant banking is generally understood to mean negotiated private equity investment by financial institutions in the unregistered securities of either privately or publicly held companies."[8] Both commercial banks and investment banks may engage in merchant banking activities.
In 2016, the Federal Reserve proposed a ban on merchant banking as part of a "take no risk" regulation strategy.[9]
See also
- Commercial bank
- Investment bank
- List of finance topics
- List of international trade topics
Further reading
References
- Merchant Bank Corporate Finance Institute, retrieved 2024-07-02^
- Merchant Banking: Careers, Salaries, and Exit Opportunities 2021-01-27, retrieved 2024-07-02^
- Fernand Braudel. La dynamique du capitalisme Flammarion, 1985-01-01^