After sharp increases in the second quarter, letter of credit volume fell during the third quarter at many large U.S. banks, according to an analysis of call report data.

First Union Corp., which has been aggressively increasing its international letter of credit business for several years, reported that its letter of credit balance fell 21% in the quarter, to $2.6 billion. The Charlotte, N.C., banking company dropped in the ranking to No. 4, as BankAmerica Corp., then of San Francisco, reclaimed its standing as the largest letter of credit processor outside New York.

Over all, eight of the 10 largest U.S. letter of credit issuers reported declines in volume during the third quarter. However, observers said there is usually a seasonal drop in demand for letters of credit in July to September.

Used primarily in international trade, letters of credit are documents issued by banks that guarantee the payment of a customer's draft up to a stated amount for a specific period.

On a year-to-year basis, four of the 10 largest issuers showed increases. They were BankBoston Corp., First Union, the former NationsBank Corp., and U.S. Bancorp.

Of the four, two have benefited from recent mergers: First Union with the former CoresStates Financial Corp. and U.S. Bancorp with First Bank System Inc. In addition, NationsBank completed its acquisition of BankAmerica on Sept. 30, the last day of the third quarter, but their rankings remained separate.

First Union grew the most, more than 800% compared with the same period of 1997.

The business also benefited from global economic instability because letters of credit eliminate the seller's risk, bankers said.

Very few foreign-owned banks were ranked among the top letter of credit institutions. Union Bank of California, majority-owned by Bank of Tokyo- Mitsubishi Ltd., was ranked No. 14, with $282 million, and Israel Discount Bank of New York was No. 15, with nearly $253 million.

Israel Discount's business grew in the past year by more than 25%; Union Bank's fell nearly 16%.

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