Europe's hapless policymakers aren't the only ones who dread a full-blown euro crisis.

This side of the Atlantic, the bosses of large financial institutions like


(C) - Get Report





J.P. Morgan

(JPM) - Get Report

may, in dark moments, wonder what would happen to earnings and their ambitious European expansion plans if the continent plunged into a currency-led economic crisis.

Such a crash probably won't happen, and with the euro recovering from its lows of earlier this month, hardly anyone is predicting one. That said, a lack of alarm among the punditry is hardly reassuring. Their analyses overlook a number of important

factors that are probably weighing in on the euro. And it's always worth recalling that hardly anyone predicted Mexico's 1994 peso crunch, Asia's money meltdowns in 1997-98, or Russia's ruble carnage nearly two years ago. All three events ate big holes in profits at Citigroup, Chase and Morgan.

In fact, a euro emergency could make these other crises look tame. Think of the economic chaos that would result if European governments dismantled the single currency, or if they took drastic measures -- like a massive raise in interest rates -- to save it from a precipitous slide.

The Paper Chase

Pity New York's money-center banks in such scenarios. Morgan and Chase are now getting far more of their revenue from Europe than anywhere overseas. Citigroup's European income appears to be substantial, but it seems less than the bank is getting from emerging markets (Citigroup provides poor disclosure of the geographical sources of its revenue).

J.P. Morgan declined to comment, while Chase and Citigroup didn't return calls seeking comment.

So far, the euro's 10.3% slide against the dollar this year hasn't had much of an effect on the banks' profits. David Berry, banks analyst at New York-based brokerage

Keefe Bruyette & Woods

, doesn't expect the weakness to hit second-quarter dollar earnings, because those three banks often do well from volatile currency markets. Keefe hasn't done any underwriting for any of those banks, and Berry rates Citigroup a market-perform, Chase a buy and Morgan an outperform.

The banks' trading desks may be making money by betting against the euro, which is down 24% against the dollar since its launch at the start of 1999, and they also earn fat margins on financial instruments they sell to clients who want protection against currency swings. "If anything, euro weakness may be good for

second-quarter earnings," says Berry.

Tumbling Dice

But that obviously wouldn't be the case if a tumbling euro were to start rocking securities markets or cratering the real economy.

Last year, 40% of Morgan's $2.06 billion in net income came from Europe, up from 25% the previous year, and only slightly less than the U.S. share in 1999. Morgan, which describes itself as a "top-tier investment bank in the fast-growing European market," is doing well in European mergers and acquisitions, advising on 80 deals valued at $395 billion last year, according to

Thomson Financial Securities Data

. It also has a significant share of the continent's international bond issuance.

Compared with other overseas regions, Chase made more in Europe than elsewhere. The continent accounted for $774 million, or 14%, of Chase's $5.5 billion in net profit. From Citigroup's murky numbers, it can be deduced that around $1 billion, or about 10%, of its core earnings, came from Europe last year. Meanwhile,

Salomon Smith Barney

, Citigroup's investment bank, is very active in Europe's M&A and capital-raising markets.

And recent acquisitions of two U.K.-based, Europe-focused investment banks underscore the U.S. institutions' deep faith in the region. Chase in April said it was going to spend $7.7 billion for

Robert Fleming

, while Citigroup paid $2.2 billion in January for


. The Schroders acquisition "doubles our investment banking platform in Europe and gets us to where we want to be in that important region several years ahead of schedule," Citigroup Chairman and CEO Sandy Weill said in a press release at the time.

From Russia With Love

So what could happen to European profits if a currency Armageddon erupted there? 1998 gives some disturbing indications. That year, the Russian shakeout and the near collapse of the

Long Term Capital Management

hedge fund mangled European earnings. At Morgan, they plunged by nearly 50% to $238 million in 1998 from $458 million the previous year. Domestic U.S. earnings held up far better, declining by 22% in 1998 to $512 million.

The picture is similar at Chase, where European earnings skidded 23% to $487 million in 1998, while U.S. profits actually edged up 4% to $2.8 billion.

It took only a devaluation in Russia -- a country with a GDP the size of Indiana's -- and problems at a single hedge fund to eviscerate European profits in 1998. What would happen to them if the European Union itself became paralyzed by currency-market havoc? Bank stock investors may want to start following the currency markets -- very closely.