George M. Salem was one of the first bank analysts to take note of the industry's push into mutual funds, declaring nearly four years ago that mutual funds are "the bank deposits of the 1990s."

Mr. Salem, of Gerard Klauer Mattison & Co. in New York, is quick to acknowledge that banks haven't made much money on mutual fund sales and management so far. Nevertheless, he said in a recent interview, banks should risk hits to earnings and stock prices to acquire fund complexes.

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What evidence do you see that mutual funds are a good business for banks?

SALEM: The main evidence is that the American consumer has adopted the mutual fund as the No. 1 vehicle for long-term investing. There's been a massive change in market share of consumers' savings. And the banks have aggravated this by keeping their rates so low; it becomes almost a no- brainer to move away from bank deposits.

The level of core deposits has been virtually unchanged since the 1980s - they're in the vicinity of $2 trillion. Mutual funds are now at $2.8 trillion - and at the end of 1985, total mutual fund assets were about $500 billion.

Should banks be content with selling funds, or should they manage them?

SALEM: Having your own becomes a much more expensive proposition, and much more risky. But a big advantage is you hold onto your customer. Introducing your customer to Fidelity is the same as introducing your wife to Tom Cruise and saying, "Here, go on a date."

How can banks hope to compete against giants like Fidelity, Merrill Lynch, and Vanguard?

SALEM: The generic bank brand can't compete with the Vanguard brand. Banks have looked at acquiring fund groups. That's what they should do. But no one is willing to bite the bullet and pay the price. I would suffer the temporary (earnings) dilution. It's critical for the next 20 years.

How does the massive consolidation of branches affect banks' ability to sell mutual funds?

SALEM: Not greatly. Most mutual funds are sold on the telephone or through the mail. I don't think Vanguard has any branches. You can have a few mutual fund service centers - not a broker in each branch.

Most analysts dismiss banks' mutual fund businesses as small potatoes. How do you respond?

SALEM: Of course they're small potatoes, but that doesn't comment on the necessity of growing it. They're overlooking what I was saying at the beginning: People aren't saving at banks anymore. Does a bank certificate of deposit hedge inflation? Does it grow? Does it earn a fair rate of return?

What are the measures of success for a bank in the funds business?

SALEM: You take profits from 0% to 10%. That would be meaningful. But you need more. I don't think banks have any idea on the hows and wherefores of running a mutual fund business. They all went with big plans and hooplas, and now you hear whimpers and silence.

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