Bank earned $1.73 billion from derivatives trading in the third quarter, 10% less than in the second, the Office of the Comptroller of the Currency said Monday.

Revenues were off $183 million from the second quarter and $209 million from third quarter 1995. Still, the showing was the fourth strongest since the agency began collecting such data in January 1995.

Commercial banks earned $990 million on interest rate contracts in the third quarter, up $39 million from the second; $514 million on foreign exchange contracts, down $218 million; and $230 million in equity and commodity contracts, down $3 million.

"This was a pretty fair quarter," said Michael L. Brosnan, acting senior deputy comptroller for capital markets. "It wasn't great. It wasn't bad. It was about average."

"Trading business and derivatives in particular have been healthy businesses for the banking industry," said Mark C. Brickell, managing director at J.P. Morgan. "These figures indicate that it is still true."

The eight largest trading banks earned more than 84% of the $1.73 billion, with Morgan Guaranty making $436 million and Citicorp taking in $435 million. Only First National Bank of Chicago reported a loss, $22 million.

The 493 other banks with derivative trading accounts earned a combined $275 million.

While revenue was falling, the notional amount of derivatives activity at commercial banks was reaching new highs. The OCC said notional derivative volume jumped to a record $19.8 trillion in the third quarter, a $782 billion increase from the second.

Interest rate contracts were the most popular derivative product, with the notional amount increasing to $13.3 trillion from $12.6 trillion in the second quarter. Foreign exchange contracts jumped to $6.2 trillion, an $85 billion increase. Only commodity and equity contracts shrunk, dropping to $351 billion from $308 billion in the second quarter.

The agency, in a quarterly analysis based on call report data, also found that banks are doing a better job protecting themselves from swings in the value of the derivatives portfolios.

Banks now net 46% of their derivatives contracts, meaning they hold off- setting positions that will prevent them from losing money if the market falls. That is up more than 3 percentage points from a year ago. Banks also are doing a better job balancing the short- and long-term values of their derivatives portfolios.

"The banking system continues to realize benefits from bi-lateral netting," Mr. Brosnan said. "This is critical because credit risk is a very significant exposure for the banking system."

The agency also found:

*Over-the-counter derivatives made up 87% of bank holdings; exchange traded contracts were 13%. "OTC contracts tend to be more popular with banks and bank customers because they can be tailored to meet firm-specific risk management needs," the agency said.

*Total credit exposure from derivative contracts rose to $238 billion, a $3.5 billion increase. But banks were holding more capital reserves than in past quarters, causing the ratio of risk-based capital to credit risk to fall 7.1 percentage points to 236.9%.

*Credit losses in the third quarter totaled $37 million. The book value of derivatives contracts more than 30 days past due was $21 million.

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