Evolutionary History and Structural Patterns of Investment Banks in the United Kingdom

In the United Kingdom, investment banks are also known as merchant banks. They were created in response to the increasing demand for financing and services in overseas trade.

After the eightieth century, London gradually replaced Amsterdam as the international financial center. It played that role until the period leading up to the First World War. In that period, increasingly intense international trade competition led to a decline in revenues from overseas trade. At the same time, the trend toward specialization became increasingly prominent in the manufacturing industry, which made businessmen in the manufacturing industry unable to afford the financial risks associated with market exploration. In order to distribute risks and meet the demand for financing, the United Kingdom established a large number of accepting houses in London. In their early stage, these accepting houses specialized in taking financial risks associated with export. Later, they expanded their business to cover fund-raising for large companies with international operations or even foreign government, in addition to the traditional acceptance and trade loan business. These financial institutions had distinctive family business characteristics. The larger ones among them included the Rothschild family and the Barings Bank. However, they were considered typical merchant banks. Besides engaging in conventional deposit/loan business and earning income from the difference of interest rates, they also helped their clients raise funds, provided financing for public projects launched by the government, and made investments with the bank's own capital.

After World War I, the United Kingdom's status as the international financial center declined. Although it still had the most developed merchant bank business in Europe, the banks entered a period of slow development.

During the Great Depression of the 1930s, international trade was drastically reduced. Business focus shifted to corporate finances as the banks arranged fund sources for companies, helped with corporate financing efforts through the issuance of bonds and shares, and provided counseling services for acquisitions, mergers, and restructuring. The role of merchant banks became provider of relevant financial services for companies. This included making arrangements for the sale or issuance of the shares of a company to the public, finding ways to get the shares of a company listed in a securities exchange, and providing acquisition and merger counseling. Other activities included managing investment funds for charities, insurance companies, pension funds, investment trusts, and unit trusts. The banks also provided general bank services, such as accepting demand deposits and time deposits, but mainly for corporate clients.

After the 19 70s, the privatization of state-owned enterprises in the United Kingdom provided merchant banks with a broad base for their business. On October 27, 1986, the London Securities Exchange adopted the Financial Service Act, which broke the previous rigorous business barriers between merchant banks and commercial banks. The act allowed strong domestic and foreign commercial banks, insurance companies, and securities companies to apply for membership with the London Securities Exchange, or to directly take part in the securities business with a 100 percent stake in a member organization. Entering the twentieth century, some merchant banks in the United Kingdom kept the traditional bill acceptance as their main business, as typified by the 17 members of the Accepting House Committee (AHC). Other merchant banks, however, entered the capital market, engaged in the securities underwriting business, and played the role of intermediaries and managers.

When the subprime mortgage crisis broke in 2008, Barclays Banks rushed to acquire the investment banking and capital market units of Lehman Brothers. This secured its status in the U.S. financial market and a top 10 ranking among investment banks around the world. Today's well-known investment banks in the United Kingdom include Barclays, HSBC Holdings, and the Royal Bank of Scotland.

The most fundamental characteristic of the European model, as represented by investment banks in the United Kingdom, is a high degree of integration and interpénétration between the investment bank business and the commercial bank business. This is important because British merchant banks take a foothold in the domestic market or in continental Europe, focus on a certain business field, and secure a leading position in that field. For example, Warburg (mostly acquired by USB) has long been the leader in the field of M&A finance counseling for European enterprises and has been actively exploring the Pound-denominated bond underwriting business and the fund management business. Schroder has been aggressively exploring international business, especially arrangements for the overseas issuance of

British securities, while establishing a sound fund management system. Its tentacles have reached the United States and eastern Asian countries. The current situation in the United Kingdom is a domestic market dominated by about a dozen first-class merchant banks together with a multitude of small-sized family businesses.

 
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