Following is an excerpt from “Merchant Banking: Past and Present” by Valentine V. Craig, published by the Federal Deposit Insurance Corporation : Merchant banking has been a very lucrative—and risky— endeavor for the small number of bank

Question

Following is an excerpt from “Merchant Banking: Past and Present” by Valentine V. Craig, published by the Federal Deposit Insurance Corporation :
Merchant banking has been a very lucrative—and risky— endeavor for the small number of bank holding companies and banks that have engaged in it under existing law. Recent legislation has expanded the merchant- banking activity that is permissible to commercial banks and is therefore likely to spur interest in this lucrative specialty on the part of a greater number of such institutions.
a. What is meant by “merchant banking”?
b. What are the risks associated with merchant banking?

Accepted Answer

a. Merchant banking is the investment by a financial institution in companies, typically involving an equity interest.
b. The risks of merchant banking include the risk of loss of value, the difficulty in valuing investments (especially those of privately-held investments), and the lack of liquidity associated with some types of merchant banking activity.

Question 3.16: Following is an excerpt from “Merchant Banking: Past and Pre...

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