What is MERCHANT BANK? What does MERCHANT BANK mean? MERCHANT BANK meaning & explanation

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What is MERCHANT BANK? What does MERCHANT BANK mean? MERCHANT BANK meaning & explanation.

Source: Wikipedia.org article, adapted under https://creativecommons.org/licenses/by-sa/3.0/ license.

A  merchant   bank  is a financial institution providing capital to companies in the form of share ownership instead of loans. A  merchant   bank  also provides advisory on corporate matters to the firms in which they invest. In the United Kingdom, the historical term “ merchant   bank ” refers to an investment  bank .

Today, according to the U.S. 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.” Both commercial banks  and  investment banks may engage in  merchant  banking activities. Historically,  merchant  banks’ original 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.

Merchant banks are in fact the original modern banks. These were invented in the Middle Ages by Italian grain merchants. 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. 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 applied to finance the production  and  trading of grain.

In France during the 17th  and  18th century, a  merchant  banker or marchand-banquier was not just considered a trader but also received the status of being an entrepreneur par excellence. Merchant banks in the United Kingdom came into existence in the early 19th century, the oldest being Barings Bank.

The Jews could not hold land in Italy, so they 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 the sin of usury, defined as lending at interest (Islam makes similar condemnations 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 the Jews were not subject to the Church’s dictates. In this way they could secure the grain-sale rights against the eventual harvest. They then began to advance payment against the future 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 Court Jew performed both financing (credit)  and  underwriting (insurance) functions. Financing took the form of a crop loan at the beginning of the growing season, which allowed a farmer to develop  and  manufacture (through seeding, growing, weeding,  and  harvesting) his annual crop. Underwriting in the form of a crop, or commodity, insurance guaranteed the delivery of the crop to its buyer, typically a  merchant  wholesaler. In addition, traders performed the  merchant  function by making arrangements to supply the buyer of the crop through alternative sources—grain stores or alternate markets, for instance—in the event of 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.

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 counter) in the great grain markets became centers for holding money against a bill (billette, a note, a letter of formal exchange, later a bill of exchange  and  later still a cheque).

Comments

Rocksteady365mac says:

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syrop26 says:

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