banking company were called into question when Chase Manhattan Corp. disclosed Monday that it would reduce fourth-quarter pretax trading revenues by $60 million because of overstated trading results.

While the revision would be small in the context of Chase's overall trading revenues, which totaled $2.2 billion for the first nine months, it does amount to 10% of revenues from foreign exchange for the same period.

"It's a big blip," said George Davis, a risk management consultant at New York-based Scarborough Partners and a former auditor for Citicorp. "It's the type of mistake that should be obvious."

"It raises a control issue," agreed George Bicher, an analyst at Deutsche Bank Alex. Brown.

The matter involved proprietary trading in foreign exchange forwards, which are agreements between parties to exchange currencies at a set price at a future date. It is unclear whether the inflated positions were a result of deliberate action, said a bank source, who asked not to be identified. The bank would not identify the employee who was dismissed, though the source said he was a senior trader in the global markets unit based in New York.

The $371 billion-asset banking company said it fired the employee after an internal review. Customer accounts were not affected, the bank said.

Chase notified the Federal Reserve Bank on Friday and said its internal investigation is continuing.

Though Chase found the discrepancy on its own, some market watchers said the incident points to the difficulty of closely monitoring trading activities, particularly in huge wholesale banks.

Forex revenues at Chase and other banks have declined over the last year, largely because of the effect of the euro on trading, analysts said. At Chase, revenue from foreign exchange spot and option contracts fell 23% during the first nine months of the year, to $616 million.

Such incidents have been uncommon at commercial banks, analysts said. In the fourth quarter of 1994, Chemical Banking Corp., a predecessor to the current Chase, took a $70 million pretax loss from unauthorized trading in Mexican pesos at a time when that currency was severely devalued.

Mini trading scandals have erupted from time to time at more traditional Wall Street investment banks, where commissions and other incentives have been a much bigger share of overall compensation. But as commercial banks like Chase come to rely more on trading and other capital markets activities for total revenues, risk management may become more of an issue.

"The world is changing," said Lawrence Cohn, an analyst at Ryan, Beck & Co. "Every decent-sized bank is looking at their controls today to make sure this doesn't happen."

Chase executives have said trading activities are among the most closely scrutinized. At a risk management conference in Washington last month, Lesley Daniels Webster, executive vice president and head of market risk management at Chase, said the trading portfolios are audited frequently and randomly to make sure "the traders do not game us."

This latest foreign exchange discrepancy dates back about one year, but most of the errors associated with it occurred in 1999, the bank source said.

Chase uses two internal models to value foreign exchange and other interest rate contracts. A recent routine audit of the bank's trading activities revealed small irregularities in the daily values of the contracts under scrutiny that accumulated to $60 million. The bank said the incident was isolated.

Mr. Davis, the risk management consultant, said the matter highlights the danger of relying too heavily on mechanical market risk measurements. In last year's global financial rout, many investment and commercial banks posted steep losses from their exposure to Russian bonds. Those losses in many cases exceeded the models banks had in place to set limits on exposure to certain securities.

Banks "are overly enamored with mechanical (risk) systems," Mr. Davis said. "They have to do more common sense sniffing around between audits."

Analysts said the matter would not be material. Still, the news sent Chase shares down 4.23%, to $83.5625, compared with a 1.1% drop in the American Banker index of top 50 bank stocks.

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