Low margins on domestic business used to be compensated for by profits on international trading - but these evaporated over the summer after the crisis in Asia, Russia and other emerging markets.

Now the birth of the euro has eliminated many other profitable trading activities, for example a considerable proportion of foreign exchange dealing.

Frankfurt, Germany's financial centre, will see dramatic changes

And bank lending to businesses may be partly replaced by the growth of the corporate bond market, where companies raise capital by issuing interest-bearing bonds instead of asking a bank for a loan. EMU will give companies access to a Europe-wide capital market.

There will also be substantial transition costs, for new software, new computers, the retraining of staff and the clerical work of recalculating all accounts, loans and contracts from national currencies into euros.

The changes are coming fast. Deutsche Bank, for example, expected to serve 1.5m customers using euros from day one of monetary union.

But there will also be opportunities in Euroland - for business expansion beyond their borders, both in the retail and corporate sector.

German and Dutch banks seem the best prepared, since they already carry out a substantial proportion of their business outside their own countries.

Many French and Italian banks, on the other hand, are still in the process of reorganisation after years of state ownership.

Consolidation necessary

In Europe as a whole, there are too many banks and too many bank branches, say the experts. The euro may now speed the consolidation within the banking sector.

Dutch bank ING has already begun to assert itself outside the Netherlands

There are wide variations between countries in the number bank branches - ranging from 4,000 inhabitants per branch in the UK to 2,000 in Germany and less than 1,000 in Spain.

Banks are under pressure to cut costs, and pricing in euros will make the cost differences between financial institutes more obvious.

In countries with the highest number of independent banks, like Germany and Italy, the smaller local banks will be vulnerable to takeovers and mergers.

There have already been $134bn worth of mergers in 1998 in the European financial sector, three times as much as three years ago.

Barriers to entry

Some small banks may go to the wall, but creating a European super-bank is also going to be difficult.

Retail banking accounts for the bulk of the financial business, especially in continental Europe. They offer accounts, credit cards, loans and mortgages. It is a safe business, albeit not as profitable as that of investment banks.

However, there are legal and cultural barriers for retail banks to move into other Eurozone countries.

Interest bearing current accounts, for example, are illegal in France. And customer loyalty and brand recognition may mean that acquisition is the surest route to expansion.

Direct banking however - caring for customers by telephone or the Internet - could be marketed on a Europe-wide basis.

Moving into the wholesale sector of investment banking is even more difficult. It requires huge resources to fund the high-priced traders and to underwrite large share and bond issues - and to withstand the fluctuations in trading income.

Major players like Deutsche Bank and Dresdner have bought UK investment houses Morgan Grenfell and Kleinwort Benson to insure their presence in this market.

Some of the French banks with deep pockets also have aspirations in this direction.

Intense competition and the heavy losses incurred during the recent turmoil on the world's financial markets have already reduced the number of players in investment banking.

UK banks stick to home turf

The UK banking sector is highly successful on its home turf, with profits far higher than those in the rest of Europe.

The main clearing banks have largely retreated from their ambitions to be global investment banks.

Both Barclays and Natwest have sold off much of their investment business after disappointing results.

And the most successful retail bank, Lloyds TSB, had deliberated avoided international exposure.

On the other hand there have already been rumours of mergers between some of the biggest players in order to create a European-style global bank - mostly recently between Halifax, the largest mortgage lender, and Prudential, the biggest UK insurance company.

It is also possible that a big European bank could buy into the profitable UK retail sector.

Threat from outside

The biggest threat to EU banks comes from outside the Eurozone.

Citibank has its eyes on European customers

The American banks in particular having been eagerly awaiting the opportunities created by the emergence of a single currency.

In retail banking, the US giant Citibank - a division of Citigroup - has built a comprehensive retail network across Europe, and plans to offer pan-European accounts in euros.

And in investment banking, the big American investment banks - Merrill Lynch, Goldman Sachs, Morgan Stanley, and Salomon Smith Barney (now part of Citigroup) - all expect a huge increase in investment in stock and bond markets.

Merrill Lynch bought the UK's Mercury Asset Management, a leading fund manager, to strengthen its presence in pension fund management.

German pension funds, for example, at present only invest 3% of their funds in foreign stocks.

And the experience of the American banks in corporate bonds and securitisation- where debts such as car loans are turned into share issues - could stand them in good stead in the new, more integrated Eurozone.

Also waiting in the wings is the Swiss banking sector, which boasts Europe's largest bank, UBS. Although damaged by losses over the hedge fund Long Term Capital Management, it has a strong presence both in investment banking and private client accounts.

Overall the financial sector will be one of the main beneficiaries of the euro - but the benefits may not be shared equally among all players.