U.S. bankers have long pointed to Europe's universal banks as a model for what they would like to become.

But as U.S. regulatory barriers separating commercial and other types of financial services weaken, some bankers and analysts say the European model has lost its luster.

Big European universal banks, they point out, have consistently posted lower returns on equity than their U.S. banking counterparts.

Deutsche Bank, one of the biggest universal banks around, had a return of only 3.2% last year while France's Societe Generale had less than 1%. That compares with an average of 16.44% for the top five U.S. commercial banks and 15.73% for the top 10.

The problem, bankers and analysts say, is that despite the ability to engage in a broad range of financial activities, universal banks have been poorly managed. They have also long subsidized unprofitable activities with earnings from profitable operations.

"Universal banks have not served their shareholders well by providing a broad range of services," remarked Arthur Soter, managing director for global banking and financial services at Morgan Stanley Dean Witter.

"I don't see any tremendous advantages in the European model," said Andre Cappon, a banking and financial markets analyst with the New York- based CBM Group.

"European universal banks are bottled up in a silo mentality, different units don't talk to each other, and many are too big and too complex to manage efficiently."

Given the current wave of consolidation in the United States, he warned, there is a real danger that U.S. banks may follow suit, becoming too big and too diversified to manage efficiently.

Universal banks, which engage in everything from insurance to investment banking and retail banking-and also have large industrial shareholdings- have long dominated banking in most of continental Europe.

Large, highly diversified universal banks like Deutsche Bank in Germany and Credit Lyonnais in France grew up in the 19th century and were part and parcel of the industrialization that began to sweep over Europe in the 1830s and 1840s.

In many instances, European governments actively promoted the growth of big banks because they believed they would best serve national economic interests. Large, far-flung banks were also needed to help develop the overseas colonies that big European countries held until the beginning and middle of this century.

More recently, European banks have gone a step further by merging or striking alliances with large insurance companies

But bankers and analysts believe that management and cross selling, more than legislation allowing banks to engage in a broad range of financial transactions, is the real key to success today. European banks' penchant for doing everything in-house, they add, may no longer be viable as outsourcing becomes more widespread.

Unlike European institutions, they predict, U.S. banks moving toward a universal banking structure will copy U.S. manufacturers, who over the last several decades have moved from producing to outsourcing products from different suppliers and acting mainly as a sales and distribution networks.

"I'm not sure that universal banking the way we know it is the best way of expanding worldwide," said Serge Bellanger, executive vice president and general manager in New York for France's CIC-Union Europeene Internationale et Cie.

Banking, Mr. Bellanger added, has become "too specialized, too technically oriented, and too risky" to put everything under the same roof.

"Whether you own or rent or enter into strategic alliances, what's more important is controlling a network of products and distribution channels," said Mr. Soter.

"What banks need is to control access to a broad array of products and distribution channels, but you don't need to vertically integrated to provide a broad array of services."

Others sound a similar note. They say that although the concept of universal banking is inherently attractive because it helps banks diversify their operations and presumably to reduce the risk of relying on a few activities, professional differences between the way commercial and investment banking are run can make combining the two activities difficult.

They also point out that universal banking worked in continental Europe to a considerable extent because European banks were able to pressure corporate customers into using them for a broad range of business. That, they say, won't work in the United States.

"Banks in Europe can tie investment banking and lending," said Lawrence Cohn, a banking analyst with Ryan Beck & Co. "That's not going to be legal in the United States and it will be a lot harder to cross sell here than in Europe where you can just jam it down your customers' throats."

Bankers point to other drawbacks in universal banking.

For example, universal banking has slowed consolidation in most European countries, with the exception of Spain and France. As a result, many European markets still have highly fragmented banking systems

Further, European banks capable of handling every type of financial transaction have failed to excel or become innovative in any one field. As a result, Europe still doesn't have investment banks capable of competing on worldwide markets, or even at home, with U.S. institutions like Morgan Stanley Dean Witter, Goldman Sachs, Bankers Trust Corp., and J.P. Morgan & Co.

Still, some bankers believe that with the right management, universal banking is the way to go.

"We're strong believers in the concept of risk diversification and expanded business opportunities ," says George N. Fugelsang, chief executive for North America at Dresdner Bank, Germany's third-biggest bank. Increasingly, he added, U.S. banks will follow the European model.

"No one is sitting at the top of U.S. banks and saying: Let's do it the European way," Mr. Fugelsang observed. "Universal banking is coming about naturally because of consolidation."

Bankers and analysts also believe the United States is heading toward a version of universal banking that will in some respects be similar to the European model but in other respects will be very different. The spread of Internet banking will accelerate this differentiation, they add.

Analysts warn that U.S. banks are not the only ones out there building financial conglomerates and may not necessarily be the institutions that come out on top. Banks, insurance companies, investment banks and other suppliers of financial services are all moving toward building financial conglomerates, while software suppliers are chipping away at banks' networks by building the electronic gateways into financial services.

"No one has a lock on this game," Mr. Soter observed.

"Banks may still be in the lead, but this game is up for grabs."

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