A single currency for Europe won't help the cause of banks struggling to boost fee income, according to a recent study by the Boston Consulting Group.

The creation of the so-called euro, a much-debated idea since the Maastricht Treaty presented it in 1991, would by definition reduce foreign exchange volumes and the revenues that result.

Along with anticipated cost reductions from automation and intensified competition, the advent of the euro could cut bank prices for cross-border transactions in half within eight years and "remove $5 billion of revenues from the franchise," the consulting firm said.

"Although the number of (cross-border) payment transactions will double from 1994 to 2004, revenues will not grow in the same explosive way," said Nicholas Viner, vice president of Boston Consulting and co-author of the study. "In some areas, they will actually decline."

The euro, he said, "will have a very severe impact on foreign exchange." One European banker told Mr. Viner the euro would cut his institution's gross revenues by up to 25%.

If the forecast is dire for banks, it is part of what proponents of European monetary unification want: less restrictive and costly trade across the European Union and a stronger, more united economic front for competing globally.

In the payments arena, spearheaded by the French and German governments, the European Monetary Union is in the design stages of Target - a real time settlement system geared for the euro.

Target would link the gross-settlement payment systems of individual countries' central banks, obviating the need for intermediaries in cross- border transactions.

In some respects, Target would resemble the Federal Reserve System's Fed Wire.

Officials said there is even talk of building a "Eurochips" along the lines of Chips - the Clearing House Interbank Payments System, in New York - which is the biggest U.S. dollar electronic payment system.

From the sidelines, U.S. banking industry observers are assessing the risks as well as potential rewards of a conversion to a single European currency.

Participants in the European Monetary Union must adhere to stringent governmental debt and deficit levels to meet the strict eligibility requirements - actions which some economists warn could be recessionary, with global implications that could further constrict bank profits.

The foreign-exchange-related revenue reduction is sure to extend to U.S. banks, 29 of which have European offices, according to the Federal Reserve Bank of New York. Large institutions such as BankAmerica Corp., Chase Manhattan Corp., and Citicorp all have extensive international operations that should see a reduction in forex business.

Ernst & Young, which recently concluded a cash management survey of the top 300 U.S. banks, found that more than half offered cross-border payment services to corporate customers. Foreign exchange is attractive to banks in part because they "benefit from the margins at both ends of the transaction," said Larry Forman, cash management consultant at Ernst & Young.

According to Boston Consulting's study, the payments business generated $207 billion in revenue for the top 1,000 global banks in 1994, or 7% of their total.

Excluding certain types of securities trades and other types settlement transactions, Mr. Viner said about 1.3 billion cross-border payments were made in 1994, of which 30% had a foreign exchange component.

If the euro does become Europe's major currency, it could challenge bankers both here and abroad to reassess correspondent banking relationships.

"The big threat the euro presents is that it could hurt correspondent banking," particularly among European banks, said George Thomas, senior vice president at the New York Clearing House.

"It definitely would be a threat to European Union banks, so they will need to find ways" of replacing revenues they lose, he said.

Yawar Shah, senior vice president at Chase, agreed there will be further consolidations in correspondent banking relationships between U.S. and European banks.

"Banks will have to make the decision whether to remain as U.S. dollar niche players," or opt to become more global, multicurrency clearing institutions, Mr. Shah said. "It will be fairly Darwinian in its application."

Another impact from the euro, besides possibly challenging the U.S. dollar as an international currency, would be the loss of foreign exchange volume over Chips and Fed Wire.

Sources said Swift - the Brussels-based Society for Worldwide Interbank Financial Telecommunication - is also hard at work studying the impact the euro and Target could have on its transaction volume.

Despite the uncertainties of a single currency, Ernest Patrikis, first vice president of the Federal Reserve Bank of New York, said the euro could help reduce foreign exchange settlement risk.

"Payments people might say, 'woe is me;' I'm saying that it's a better, sounder, safer system, so let's get our priorities straight."

Mr. Patrikis was pointing out that the lower foreign exchange volumes would tend to reduce transaction failures and settlement risks.

He predicted U.S. banks would seek new business opportunities, such as providing new settlement and cash management services for multinational companies.

Mr. Shah at Chase Manhattan said the industry would adapt. He added banks that can improve "risk management capabilities, information reporting, and intraday liquidity management are going to benefit greatly."

U.S. banks might even use Europe's impending integration to its advantage. A move to a single currency could, according to some observations, pose greater technological challenges than the year 2000, which has become a cause celebre among software vendors.

Nick Jones, London-based research program director the Gartner Group, Stamford, Conn., estimated systems costs associated with the euro will exceed $100 billion.

"You would have two of the largest information technology projects in history at the same time," he said.

On the multinational level, national payment systems have to be linked. European nations would need to run parallel systems for the old and new currencies.

That cost, which would be borne by all of Europe, excludes hardware conversions such as automated teller machines, point of sale terminals, and cash and coin handling machinery.

"If you are a bank, the impact is fairly horrendous," Mr. Jones said. "Those guys have an awful lot of work to do between now and the year 2000."

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