MERCHANT BANKING IN AMERICA AND EUROPE

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MERCHANT/INVESTMENT BANKINGA merchant bank is a financial institution which

provides capital to companies in the form of share ownership instead of loans. A merchant bank also provides advisory on corporate matters to the firms they lend to. In the United Kingdom, the term "merchant bank" refers to an investment bank.An investment bank is a financial institution that assists individuals, corporations, and governments in raising capital by underwriting and/or acting as the client's agent in the issuance of securities. An investment bank may also assist companies involved in mergers and acquisitions, and provide ancillary services such as market making, trading of derivatives, fixed income instruments, foreign exchange,commodities, and equity securities.

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HISTORY OF MERCHANT BANKING

Merchant banks are in fact the original 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

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HISTORY OF BANKING IN AMERICA

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CONTINUED….

In the 19th century, the rise of trade and industry in the US led to powerful new private merchant banks, culminating in J.P. Morgan & Co. During the 20th century, however, the financial world began to outgrow the resources of family-owned and other forms of private-equity banking. Corporations came to dominate the banking business. For the same reasons, merchant banking activities became just one area of interest for modern banks.

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1930S GREAT DEPRESSION

During the first 10 months of 1930, 744 US banks failed. By April 1933, around $7 billion in deposits had been frozen in failed banks1930s Great Depression led many countries significantly increased financial regulation. The U.S. established the Securities and Exchange Commission in 1933, and passed the Glass–Steagall Act, which separated investment banking and commercial banking.

This was to avoid more risky investment banking activities from ever again causing commercial bank failures.

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Two collapses of the stock market and the sub-prime crisis have taken their toll on the investment banking industry.

Landmark companies including Bear Stearns, Lehman Brothers and Merrill Lynch have been adversely affected in the sub-prime crisis.

Goldman Sachs and Morgan Stanley have moved from pure play investment banks to become commercial banks after the repealing of the Glass-Steagall Act.

But still, investment banking remains a key element of our capital markets.

Goldman Sachs, UBS, Credit Suisse are the major players in the global investment banking industry

Current Scenario

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Bank of America Merrill Lynch achieved

the 2nd highest revenues of any investment bank worldwide in 2010, with a global market share of 6.8 %.

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It is a major provider of financial services with assets of $2 trillion .

It is the world's second largest public company based on a composite ranking (Forbes).

J.P. Morgan

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Goldman Sachs is a leading global investment banking, securities and investment management firm

Provides services to a substantial and diversified client base like corporations, financial institutions, governments and high-net-worth individuals.

Goldman Sachs is the successor to a commercial paper business founded in 1869 by Marcus Goldman. On May 7, 1999, the Company converted from a partnership to a corporation and completed an initial public offering of its common stock.

On September 21, 2008, the Group became a bank holding company regulated by the Board of Governors of the Federal Reserve System

Goldman Sachs

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The Glass-Steagall Act was enacted during the Great Depression. It protected bank depositors from the additional risks associated with security transactions. The act was dismantled in 1999. Consequently, the distinction between commercial banks and brokerage firms has blurred; many banks now own brokerage firms and provide investment services.

Glass-Steagall Act

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THE MODERN MERCHANTBANK

During the 20th century, European merchant banks became increasingly involved in the actual running of the business for whom the transaction was conducted. Today, merchant banks actually own and run businesses for their own account, and that of others.Since the 18th century, the term merchant banker has, therefore, been considerably broadened to include a composite of modern day skills. These skills include those inherent in an entrepreneur, a management advisor, a commercial and/or investment banker plus that of a transaction broker. Today a merchant banker is who has the ability to merchandise --that is, create or expand a need –and fulfil capital requirements.

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BRITAIN

Merchant banking in Britain developed partly as a result of the operation of historical factors and partly in response to the requirements of trade and industry for their short and long term needs. Though merchant banks themselves collect deposits and grant credit to a limited extent,

they act mainly as intermediaries to : In channelling short term credit from commercial banks through discount houses to merchants engaged in the import and export trade or in the marketing of goods in the domestic market.

In channelling medium and long term capital from those who wish to lend to those who are in need of funds. 

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MBs render a variety of advisory services to individuals and corporate bodies including such financial institutions as investment trust and unit trusts, of which they are the promoters and managers. MBs therefore from an integral part of the complex of financial institutions like commercial banks, discount houses, long-term financial institutions and capital markets and have therefore established intimate business relationships with them through daily contacts and advisory services.The prominent MBs act as issuing houses, some are financial bankers, some do foreign exchange business, some are engaged in bullion business. All of them do banking in some form by keeping money incurrent or other accounts for their customers at home or abroad. This type of banking activity ancillary to other services, but the keeping of current account on which their customers draw by cheque is a substantial business for many of them.

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keeping of securities in safe custody including the accounts of customers and making and realizing investments on their behalf. This has led in many cases to giving advise to customers on their investments as well as on the management of pension funds, college endowments and other funds of a similar nature.

Some of them have an active trustee business which either a departmentor a separate subsidiary company handles. They also act as registrars and transfer agents for industrial companies.

Many MBs have promoted and are managers of investment trusts and unit trusts. By developing unit-linked insurance business, they have set up their own life insurance companies, or have established business connections with the existing life insurance offices.

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MBs are active in the followingManage individual funds individuals, firms or charitable trusts on a large scale.Finance foreign trade both in acceptance business and in the post-war practice of arranging medium term export credit.Advise a growing number of industrial companies not only on how and when to raise capital but also on their financial affairs generally.Engaged in foreign security business, placing American shares in Europe and vice versa, running European and off-shore trusts thus concerning themselves with foreign loan business.Europe accounts for 35% of investment banking revenues and US 45% and Asia accounted for 20% in the year 2011.

Investment Bank

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Investment banking was perhaps lagging in France in front of the City, as this one was the hub of worldwide financial operations and of globalised forex. But French companies helped the Paris marketplace to take part to this international economy.it could also be argued that French culture is innately unsuited to investment banking. Lucy Wadham, a writer formerly married to a French investment banker, postulates that French culture is all about the achievement of status through nobility and ideas.France’s Socialist government for stimulating business growth by setting up a state-owned investment bank offering €42bn in financial backing for small and medium-sized enterprises. It is aimed at providing finance and long-term support for business and export development which is currently lacking for smaller companies

FRANCE

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It acts on three core businesses that are equity brokerage, equity derivatives and asset management has an Equity of € 414.1 million (2009)

performs most of the traditional investment banking functions of the group including mergers and acquisitions advisory, and equity raising operations such as Initial Public Offerings (IPOs), rights issues, and convertible bond issues.

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GERMANY

Commerzbank, the country's third-largest listed bank, announced big layoffs in investment banking, where it made an operating loss of €171m ($210m) last quarter. That leaves only two German institutions, Deutsche Bank and Dresdner Bank, with pretensions to international investment banking.

This is happening at a time when optimists predict a big increase in demand for investment-banking services in Germany in the next few years. Privatisations worth an estimated €50 billion are in the pipeline.

Corporate restructuring and spin-offs should generate €1.7 billion a year in mergers and acquisitions (M&A) fees.

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Spain's Banco Bilbao Vizcaya Argentaria (BBVA) SA is launching an aggressive bid to expand its investment bank in Latin America, Asia and the U.S., a move that seeks to take advantage of its existing footholds and the weaker position of some rivals.

GENERAL SCENARIOEurope’s failure to resolve its sovereign-debt crisis will force investment-banks to be out of business. Deal making fees may drop 25% this year from 2009.

The Bloomberg Industries European Investment Banks Index, which tracks UBS, Barclays, Deutsche Bank AG, and Credit Suisse Group AG, has dropped 4.7% this year compared with a 13% gain in the 329-member MSCI World Financials Index.

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European crisis would have an adverse impact on Investment banking jobs.

Market Fluctuation Slows Growth The Impact of Increased

Regulation.

More job losses predicted by European banks as crisis refuses to fade.

Cost cutting to bite in first half of 2013 with more job losses

Impact of sovereign debt crisis expected to increase.

The industry will be reshaped through consolidation, asset sales and joint ventures.

Renewed emphasis on increasing cash reserves and deleveraging

CONCLUSIONS

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Provide stability and employment to more people. Bringing about economic reforms and recovery proposals that involves the following.

direct loans to banks and banking regulation,

less austerity, more investment, increasing competitiveness, addressing current account

imbalances, mobilization of credit.

INVESTMENT BANKING SOLUTIONS