Merchant Bank

Merchant Bank

What is a merchant bank?

Merchant bank is a banking company that deals with international finance and offers a range of services to its clients. These services include equity underwriting, securities management, investment banking, portfolio management, project promotion, advisory services, corporate advisory, credit syndication, etc.

History of merchant banks

Historically, the purpose of merchant banks was to facilitate and finance the production and trade of goods, hence the name. The first merchant banks appeared in medieval Italy and from the 11th century started developing in other countries, that is, mainly in England and France, during the large European fairs.

Merchant banks became even more widespread in the United Kingdom in the 18th century. The expansion of banks and the increase in their functions led to the emergence of a large number of new organizations in the trading countries, such as Great Britain and Germany. This is how Europe's oldest merchant banks, Barings Bank and Berenberg Bank, came into being.

Industry and trading were growing rapidly in the United States as well. Large private merchant banks appeared in the US in the 19th century, the main of which was J.P. Morgan & Co.

In the 20th century, however, the resources of private and family banks could not withstand the pressure of the growing financial market. Corporations established their dominance. Merchant banking became only one of the areas of interest of modern banking, but it retains its position to this day.

How does a merchant bank work?

Merchant bank activities are mainly based on the service of trade transactions and intermediary assistance in the process of primary placement of securities on the stock market. They offer credit, investment, and financial services to wealthy people and private international companies. As opposed to retail or commercial banks, merchant banks do not provide services for the general public.

Merchant bank clients are often companies that are not looking for financing through IPOs, which is more appropriate for larger companies. Thus, the merchant bank invests in the company on its own or by attracting investors, and in exchange receives a share of the company's stock. If the client looks for alternative financing for acquisitions and mergers, this also falls under the scope of merchant banks.

The main services provided by merchant banks are:

  • maintaining bank accounts of their clients,
  • financing of foreign trade operations,
  • banking for acquisitions and mergers,
  • share issuance and placement,
  • underwriting,
  • venture capital financing,
  • management of insurance companies,
  • handling of commodity transactions.

Functions of merchant banks

Merchant banks carry out different functions, the main ones being the following:

Equity underwriting

To make the placement of securities on the stock exchange as comfortable and profitable for the issuer as possible, merchant banks offer an equity underwriting service. They determine the value of the company, the volume of the issue and the initial price range of the offering, take care of all the paperwork, and provide informational and analytical support.

Credit syndication

Merchant banks assist in all stages of obtaining short- and long-term loans from financial institutions. They provide the client with a package of services, from selecting the right financial institution and approving the loan application to assessing costs and developing a financial plan.

Portfolio management

There is a portfolio management function for institutional and other investors. To achieve investment goals, merchant banks assist in buying and selling securities.

Examples of merchant banks

The major merchant banks in the US and around the globe are:

  • Citi Bank
  • JP Morgan
  • Bank of America
  • Merrill Lynch
  • Goldman Sachs
  • Morgan Stanley
  • Barclays Capital
  • Credit Suisse
  • Deutsche Bank AG

Merchant banks vs. investment banks

The main differences between a merchant and investment bank are listed in the table below:

Merchant bank

Investment bank

Provides services for private international companies and wealthy people

Provides services for larger companies and wealthy people

Provides trade financing services

Mostly does not provide trade financing services

Fee-based

Both fee- and fund-based

Helps with private placement

Helps with IPOs

Provides with public equity

Finds suitable investors

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2022-06-27 • Updated

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