Merchant bank: Difference between revisions

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In [[Bank|banking]], a '''merchant bank''' is a financial institution primarily engaged in international finance and long-term loans for multinational corporations and governments.<ref>[ Investopedia: Merchant Bank]</ref> It can also be used to describe the [[private equity]] activities of banking.<ref>[ Merchant Banking: Past and Present]</ref> This article is about the history of banking as developed by [[merchant]]s, from the Middle Ages onwards.
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Merchant banks, now so called, are in fact the original "banks". These were invented in the [[Middle Ages]] by [[Italy|Italian]] grain merchants. As the [[Lombardy]] merchants and bankers grew in stature based on the strength of the [[Lombard]] plains [[cereal]] crops, many displaced [[Judaism|Jews]] fleeing [[Spain|Spanish]] persecution were attracted to the trade. They brought with them ancient practices from the middle and far east [[silk routes]]. Originally intended for the finance of long trading journeys, these methods were now utilized to finance the production of grain.
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The Jews could not hold land in Italy, so they entered the great trading [[piazza]]s 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 the sin of [[usury]]. The Jewish newcomers, on the other hand, could lend to farmers against crops in the field, a high-risk loan at what would have been considered usurious rates by the Church, but did not bind the Jews. In this way they could secure the grain sale rights against the eventual harvest. They then began to advance against the delivery of grain shipped to distant ports. In both cases they made their profit from the present discount against the future price. This two-handed trade was time consuming and soon there arose a class of merchants, who were trading grain [[debt]] instead of grain.
The Jewish trader performed both finance (credit) and an underwriting (insurance) functions. He would derive an income from lending the farmer money to develop and manufacture (through seeding, growing, weeding and harvesting) his annual crop (the crop loan at the beginning of the growing season). He would underwrite (insure) the delivery of the crop (through crop or commodity insurance) to the merchant wholesaler who was the ultimate purchaser of the farmer’s harvest. And he would make arrangements to supply this buyer through alternative sources (the merchant function) of supply (such as grain stores or alternate producer markets), should any particular farming district suffer a seasonal crop failure. He could also keep the farmer (or other commodity producer) in business during a [[drought]] or other [[crop failure]], through the issuance of a crop (or commodity) insurance against the hazard of failure of his crop.
Thus in his underlying financial function the merchant banker (trader) would ensure the continuous smooth flowing of the commodity (crop, [[wool]], [[salt]]; salt-cod, etc.) markets by providing both credit and insurance.
It was a short step from financing trade on their own behalf to settling trades for others, and then to holding deposits for settlement of "billete" or notes written by the people who were still brokering the actual grain. And so the merchant's "benches" (bank is a corruption of the Italian for bench, as in a [[counter]]) in the great grain markets became centers for holding money against a [[bill (currency)|bill]] (''billette'', a note, a letter of formal exchange, later a [[bill of exchange]], 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.
[[Islamic banking]] has the same constraints against usury as Christianity.
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.
This course of events set the stage for the rise of banking names which still resonate today: [[Schroders]], [[Warburgs]], [[Rothschilds]], even the ill-fated [[Barings]], were all the product of the continental grain trade, and indirectly, the early Iberian persecution of Jews.
It may be defined as,
“ an institution which covers a wide range of activities such as management of [[customer service]]s, portfolio management, credit syndication, acceptance credit, counseling and insurance etc.,
The merchant banks are also known as “ accepting and Issuing houses” in [[UK]] and as “Investment Banks” in US.
They offer a package of financial services for fee mostly in new issues market.
==Modern practices==
The definition of merchant banking has changed greatly since the days of the Rothschilds. The great merchant banking families dealt in everything from [[underwriting]] [[Bond (finance)|bonds]] to originating foreign [[loans]]. [[Bullion]] trading and bond issuing were some of the specialties of the Rothschild family. The modern merchant banks, however, tend to advise [[corporations]] and wealthy individuals on how to use their money. The advice varies from counsel on [[mergers and acquisitions]] to recommendation on the type of [[Credit (finance)|credit]] needed. The job of generating loans and initiating other complex financial transactions has been taken over by [[investment banks]] and [[private equity]] firms.
Today there are many different classes of merchant banks. One of the most common forms is primarily utilized in the [[United States]]. This type initiates loans and then sells them to investors.
<ref>Fitch, Thomas P. [1990](2000)'''Dictionary of Banking Terms''': ''Merchant Bank'' 4th Edition New York: Barron's Business Guides ISBN 0-7641-1260-0</ref> Even though these companies call themselves "merchant banks," they have few, if any, of the characteristics of former merchant banks.
==Further reading==
*{{cite book | author=Ferris, Paul | title=Gentlemen of Fortune: The World's Merchant and Investment Bankers
| publisher=[[Weidenfeld and Nicolson]] | location=London | year=1984 | id=ISBN 0-297-78380-7}}
*{{cite book | author=Wechsberg, Joseph | title=The Merchant Bankers | publisher=[[Little, Brown]] | location=Boston | year=1966}}
*{{cite book | author=O'Sullivan, M.D. | title=Italian Merchant Bankers in Ireland in the Thirteenth Century: A Study in the Social and Economic History of Medieval Ireland | publisher=A. Figgis | location=Dublin | year=1962}}
*{{cite book | author=Rosenbaum, Eduard | title=[[M.M.Warburg & CO]], Merchant Bankers of Hamburg; A Survey of the First 140 years, 1798 to 1938 | location=London | year=1962}}
==See also==
*[[Investment bank]]
*[[List of finance topics]]
*[[List of international trade topics]]
{{Refimprove|date=November 2007}}
[[Category:International trade]]
[[de:Merchant Banking]]
[[fr:Banque d'affaires]]

Revision as of 04:15, 20 September 2008

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