The term "merchant banking", although not defined in U.S. federal banking and securities laws, is generally understood to mean negotiated private equity investment by financial institutions in the unregistered securities of either privately or publicly held companies. Both investment banks and commercial banks engage in merchant banking; the type of security in which they most commonly invest is common stock.
Banks that are solely merchant banks deal mostly in international finance, long-term loans for companies and underwriting. They do not provide regular banking services to the general public.
Merchant banks first arose in the Middle Ages, when small, usually family-owned Italian merchant houses began using their excess capital to finance foreign trade in return for a share of the profits. Because this trade consisted of dangerous sea voyages, the investments were very high risk.  The center for merchant banking later shifted from the Italian states to Amsterdam and then, in the eighteenth century, to London.