Unit IV Text a Wholesale banks

The wholesale banks represent a diverse group of institutions within the UK financial system. They comprise three broad groups:

• British merchant bank;

• Other British banks;

• Overseas banks, which in turn are divided into American, Japanese and “other overseas banks”.

British merchant banks

The group of wholesale banks called the British merchant banks comprises around 40 institutions, with assets totalling £ 44.8bn in April 2000. Histori­cally, a major element of their business lay in the 'acceptance' of bills of exchange. This involves the bank in guaranteeing payment of the bill upon maturity to whoever is then holding the bill. The bank receives a fee for fulfilling this underwriting role. and hence acceptances are an early example of a bank providing non-intermediary services. Such acceptances feature on the balance sheets of the accepting bank only as a footnote - contingent liabilities offset by contingent (possible) claims against the drawers if the bills. Once a bill is accepted by a reputable bank it becomes much more market­able, and as a consequence the merchant banks facilitate the use of bills as a significant source of short-term corporate finance.

The risk involved in accepting bills of exchange is that the debtor may default when the bill matures. As a consequence, the key to running a profitable acceptance activity was being able to evaluate accurately the default risk associated with bills, and to do this the merchant banks had to acquire con­siderable information and expertise. Subsequently, they found they could use tills information and expertise in other areas, and as a result the British mer­chant banks have progressively diversified away from acceptances as the main element of their business. The majority now offer a wide range of banking services to corporate customers so that in addition to taking in deposits and making loans on a wholesale basis and the acceptance activity, the merchant banks as a group now offer:

• Management and underwriting of capital issues by companies:

• Management consultancy services, especially with regard to financial aspects;

• Advice on mergers and takeovers:

• Fund management services for pension funds, insurance companies, unit and investment trusts;

• Trading in foreign exchange markets:

• Trading in the bullion (gold and silver) markets;

• Trading in the eurocurrency markets:

• Trading in the derivatives markets.

Like the retail banks, the British merchant banks have also suffered from increased competition within their spheres of activity. Many have perceived themselves to be too small to withstand this competition, especially from in­stitutions abroad, as their activities become increasingly international in character. In addition, the ability to participate in the capital markets has become increasingly attractive to the retail banks. This has meant that many of the merchant banks have become part of larger banking groups, either UK-based or overseas. For other merchant banks the consequence has been a rethinking of their strategy and the basis of future competition, which has led to some of the smaller banks competing on the basis of expertise within specialist market niches. The larger ones are tending to be known as invest­ment banks, derived from their trading in investments.