Merchant Banks

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Mar 16th, 2010
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Merchant Banks term is very widely used in Europe and refers to their origin as mercantile houses specializing in the export of British products, particularly cotton cloth, and the import of any products of the countries where they were established. This involved remitting money from one country to another, and the bill of exchange on London becomes the means of financing the import and export trades. The merchants concerned became well known as absolutely reliable firms whose signature on a bill would make it readily discountable on the money market.

The change to banking developed as the number of firms trading with overseas territories increased. Many of these new firms found that they respect and trust enjoyed by the well-established houses, so that their bills of exchange were less readily discounted. The solution was found to be the accepting of these traders' bills by one of the older well-established firms, for a consideration in the form of commission. Gradually the merchant became a banker specializing in the accepting of bills for other merchants.

Afterwards, merchant banks (bankers) started issuing foreign bonds for overseas governments who lacked capital. The issue of these bonds was only possible if the names of famous houses appeared in association with the issue. The merchant banks (bankers) arranged for a quotation on the London Stock Exchange and handled the issues which were subscribed for by British and overseas investors. Today the issue of "Eurocurrency" and "Petrocurrency" bonds is again becoming an important activity for merchant banks.

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