Europe is the big battleground for the global custody industry. It is here that the customers of custody services - pension funds - have the greatest choice: the big US banks, the European giants such as Deutsche Bank, BNP Paribas and HSBC, and the niche operators such as Pictet.

In the US, the Bank of New York, State Street and JP Morgan are dominant. In Europe, however, they have to contend with stiff competition from two quarters: other US banks with a large international presence, such as Citibank; and European banks trying to move up the global custody league tables on the back of dominance in their own backyard. Deutsche, BNP Paribas, and HSBC are all ranked in the top 10, according to a survey by globalcustody.net.

It is easy to see why the big custodians are all competing for a slice of the European market. The important worldwide trends that make custody such a compelling business on a global scale are at their most striking in Europe: the rise of the pensions market, the growth of cross-border investment, the emergence of the super-wealthy. Across the continent, some countries are facing a so-called "pensions time bomb", with their promises to pensioners looking ever more expensive - and unrealistic - as people live longer and enjoy unexpectedly long periods of retirement.

It is prompting some countries to introduce private pensions. In recent months, there has been dramatic progress in Germany. There, people are being encouraged to pay into privately funded retirement schemes, and this is expected to generate an extra E30-E40bn by 2008 for the financial services sector.

This, in turn, is creating something of a savings boom, even at a time of stock market uncertainty, with ordinary people rushing to put their money into pensions, mutual funds and other savings products.

Europe's mutual fund market is now worth E2,500bn, and, according to Deutsche Bank, has seen a net inflow of E62bn in the year to April 2001.

Meanwhile, these assets are being invested in a different way, partly because of the arrival of the euro. Any currency risk associated with trades between countries in the euro-zone has disappeared, and this has led to a surge of pan-European investments.

Custodians with a global, and particularly pan-European, outlook are well-placed to make the most of this trend.

Robert Binney, managing director of Citibank's worldwide securities services division, says: "German investors are investing outside Germany, and the moment that happens, we get interested because, in general, their local bank is good only for domestic German investments. Most German banks do not have a regional network: we do."

Another trend is the boom in private wealth over the past three years. In 1998, there were 1.84m Europeans with more than $1m of liquid financial assets. By 2000, this number had grown to 2.31m - a 25 per cent increase - according to a recent survey by Merrill Lynch and Cap Gemini Ernst & Young. They possessed $7,200bn of assets, just over 30 per cent of the $27,000bn possessed by the world's exclusive club of dollar millionaires. By 2005, they are predicted to possess over $10,000bn of assets: that is behind the figure for the US ($13,000bn) but ahead of the figure for Asia ($7,300bn).

Europe is also attractive for other reasons. One is the rising importance of corporate governance across the continent. Many custodians' play a central role in helping pension funds and others fulfil their duties as shareholders, often providing a proxy voting service.

This function is set to become more important, and perhaps more lucrative, as the big pension funds, especially those in the US and UK, demand the same shareholder rights in France, Germany and elsewhere as they do in their home countries.

The big custodians, that offer a powerful proxy voting service, along with translation and legal capabilities, stand to gain in what could be atough fight between powerful international shareholders and local company executives used to having things their own way.

Another European attraction for custodians is changing regulation, which, in some cases, is likely to open up more doors to new business. In the UK, for instance, the newly-elected Labour government is reviewing radical proposals for protecting pensioners' funds, set out in a report by Paul Myners, chairman of Gartmore Investment Management.

New legislation, introduced in the wake of the Robert Maxwell pensions scandal in the mid-1990s, did not oblige pension fund trustees to place their workers' pension savings with an independent custodian. This was because, among other things, custodians were not then regulated. Now they are, says Mr Myners, and although the great majority of UK pension funds use custodians independent of the employer, not all do.

In particular, the small and medium-sized funds have not placed their assets with a custodian. There are about 700 pension funds with assets in excess of £100m, and less than half of these use a directly appointed custodian.

This gap in the market has recently attracted smaller custodians, such as KAS Associates, a Dutch global custodian ranked in the world's top 20, with $191bn of assets under custody.

If the big US banks dominate the industry, there is, in Europe at least, room for the small but dedicated participants, too.