Do You Know What a Merchant Bank Is?


The term merchant bank refers to a very specific kind of financial institution. A merchant bank provides services that are quite different from what people would normally think of when they think of a commercial bank that lends regular customers loans, offers checking and saving accounts, and so forth. Instead, a merchant bank is more concerned with things like financing on an international level, loans given to very large-scale businesses, and the underwriting of stock.

The practice of merchant banking was actually performed by some of the earliest financial institutions in the world. The first merchant banks were formed in Europe during the 1600’s. The purpose of these banks was to facilitate trade among different countries in Europe and around the world. More recently, the industry of merchant banking has become much more closely tied to providing services for corporations. However, due to the fact that many huge corporations now run operations in hundreds of countries simultaneously, the international aspect of merchant banking has survived.

Of the services a merchant bank provides for its clients, stock underwriting it perhaps the service merchant banks are the most known for. The client for this service will be a large scale business that wishes to produce income by releasing shares of stock in the company. Once the business has decided to go public, it will send representatives to the merchant bank to hammer out the deal. After a contract for stock underwriting has been agreed to, the merchant bank will be left with the task of making sure the process of going public goes smoothly.

Things the merchant bank is likely to decide include how many shares of stock should be sold, what the share price should be at the initial offering, and exactly when the shares should be released. The merchant bank will also perform the task of handling all the paper work that needs to be filed with different government agencies and market overseers. The merchant bank may also handle all the marketing related to the release of the company’s stock. However, sometimes this is a joint effort between the bank and the company.

For certain mega-sized corporations, this process of stock underwriting may in fact be conducted by several merchant banks that pool their resources to make sure the public offering goes well. However, there will still be one merchant bank who acts as the head underwriter of the company’s stock.

Many merchant banks also provide what is commonly referred to as wholesale banking services. Wholesale banking is a catch-all term that refers to financial institutions that can provide a host of different services for businesses. One such service a merchant bank may provide for a corporation is facilitating a merger between that company and another corporation. Alternatively, a merchant bank may also assist a larger company through the process of acquiring a smaller competitor. Another common service provided is managing a leveraged buyout.

The merchant bank will also manage funds for these very huge corporate clients. These funds and assets will be managed in a way so that they are invested in different portfolios with the hope of growing the investment. Due to this practice, merchant banks are also sometimes referred to as investment banks.

One of the greatest assets a merchant bank has is its wealth of experience in dealing with large scale corporations with an international scope. In many ways, a merchant bank is simply not a bank. While performing investments, lending money, and managing assets are some of the core business functions of any merchant bank, the bank also exists as a source of advice for corporations and businesses that wish to expand or go public. Advice given may include advice on nearly every facet of business. This could include advice on how to best expand operations internationally. It could also be advice on how to improve a company’s performance by altering its business plan.

Whatever the case, merchant banks are integral partners for many large corporations that provide many more services for those businesses than simply managing liquid assets.

This post was written by

jason – who has written posts on Budget Clowns.
Father of three and married to a lovely women. Always looking for ways to save money, and invest it properly for my children's future.

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