Money Tips Network

Many merchant banks were begun by immigrants, refugees or Jews, shut out of the rather stuffy world of the clearing banks. The wheeling and dealing involved appealed to the more adventurous spirits. However, after the early inspiration of a maverick leader, the merchant banks quickly became absorbed into the mainstream establishment .there are a lot of very blue-blooded merchant bankers.

Acceptance business is a way of lending a bank’s name rather than its money – the bank is liable only if the client fails to pay up. Although they rarely grant overdrafts, the accepting houses do make loans to businesses, usually for fixed terms. The merchant banks are particularly tied up with the financing of trade and apart from the acceptance credits, they are active in areas like cross-border leasing (a form of international hire purchase, (project finance (where a loan is tied to a particular scheme with the profits from the scheme being used to repay the loan) and factoring (where a company borrow money on the strength of its customer invoices).

The main difference between the retail banks, like Lloyds and Barclays, and merchant banks is that the former have access to a vast pool of customer deposits. The latter’s profits depend on financial expertise – earning fees is as important to them as the traditional banking process of earning more fro investments than is paid for deposits. This makes them considerably smaller than their retail cousins. Merchant banks claim that they uniquely have the skills to pilot through complicated financial deals. So merchant banks are frequently involved in share listings, bond issues and company takeovers.

Merchant banks do not normally seek to attract business or deposits from the general public: you would need to be pretty rich before a merchant bank would think it worthwhile to accept your custom. The most important clients of merchant banks are large companies, government institutions and other banks. The merchant banks obtain their funds from deposits from these clients or by borrowing from other banks in the money markets. Most of these deposits have fairly short maturities (i.e. less than a year, (and as a result, merchant banks prefer to lend money only for short periods.

If a client wishes to borrow funds for more than a year, a merchant bank will normally set up a credit facility. Under such a facility, the maximum amount that can be borrowed will be carefully controlled and the interest rate will vary throughout the lifetime of the loan, according to some agreed formula. Should the borrower wish to borrow more than any one bank would want to lend, the merchant bank will arrange for others to join the facility.

Although these lending activities bring in the bulk of the profits for the merchant banks, the business which brings the bank the most publicity is their corporate finance work. Probably the most important part of this business is handling new issues of company shares on The Stock Exchange. The mechanics of a new issue are described in Chapter 10. The fees involved in arranging a new issue can be substantial –several million pounds for a large issue such as a privatization.