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What is merchant banking?

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Quick Answer

Merchant banking is a type of banking that deals primarily with international financing, underwriting and commercial lending, explains Investopedia. This type of banking provides specialized banking services and generally does not deal with the general public. Merchant banks were first used in the Italian states during the Middle Ages.

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What is merchant banking?
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Full Answer

Merchant banks provide clients capital in the form of shares of publicly or privately held companies, notes the Federal Deposit Insurance Corporation. Multinational corporations are provided advice from merchant bankers on topics such as acquisitions and mergers. Merchant bankers also provide credit syndication, portfolio management and insurance services.

Merchant banking may be in the form of investment or commercial banks. Investment banks do not accept deposits and are solely focused on investments, whereas commercial banks offer retail banking services such as loans, investments and deposit accounts, states the FDIC.

Past dealings by merchant banks include working with commodities such as wheat. This was done by merchant banks offering farmers cash in exchange for the wheat the farmers would produce. The loans were used to finance farming or long trips. Today's merchant banks mostly deal with a variety of equity investments, and the industry bears little resemblance to its past services, notes the FDIC.

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