UK banks are more profitable than ever, yet the sector as a whole is facing a decline, with falling share prices and a wave of takeovers.

That paradox lies at the heart of the crisis in British banking.

Banks are under attack on two fronts: from more efficient rivals, who use the internet or telephone banking, and from consolidation in Europe, which is threatening to create huge banking groups that outgun the UK clearing banks.

The takeover of NatWest, one of the proudest names on the High Street, by its smaller rival Royal Bank of Scotland is just one sign of the turmoil in the sector.

Experts predict that many more bank takoevers and branch closures will be needed to make the sector competitive once more.

Threat from Europe

In the longer term, the UK banking sector also faces a threat from the global banking giants, especially in Europe.

The creation of the euro has led to a rapid consolidation of European banks into national superbanks, most of whom are larger than the UK clearing banks.

Banks like Deutsche Bank, Credit Suisse and ING Barings are looking to expand in Europe after consolidating their position at home.

The high profits made by banks in the UK domestic market is bound to attract increasing interest.

And the takeover of Mannesmann by the UK's Vodafone AirTouch suggests that takeovers could be two-way, with a few of the stronger UK banks attempting to move into Europe.

Threat from the internet

The biggest threat to bank profits comes from the rapid expansion of financial services on the internet.

Insurance giant Prudential has had a huge success in launching its internet savings bank, Egg, with one of the highest interest rates in the sector.

First-e, an Irish based e-bank that has French banking, also launched recently, as did the Co-op's internet banking service, Smile.

Although many of the UK's traditional banks do permit customers to carry out some transactions online, they have not developed services to the same extent as their rivals.

And the internet also puts pressure on costs, as consumers can shop around for the cheapest mortgage or savings rate more easily.

Branch closures

Traditional banks also face a similar threat from telephone banking.

One reason why the Royal Bank of Scotland has succeeded in its bid for its larger rival, NatWest, is the success of its telephone insurance service, Direct Line.

Costs of running internet and telephone banking are much lower than the cost of running thousands of fully staffed High Street branches.

But the large banks face opposition from local customers and unions in their attempts to slim down and reduce the number of branches.