The dramatic dip in commercial banks' trading income in the first quarter has grabbed the attention of analysts at Standard & Poor's Corp.

Trading income dipped more in the single quarter than in any full year of the past decade, noted Tanya Azarchs, director of S&P's financial institutions group.

"We have been disturbed by losses from proprietary trading operations," she said. "This had led us to reassess how we look at trading at some of the firms."

Prompting a Downgrading

The losses were a major factor in S&P's recent decision to downgrade Bankers Trust New York Corp. from AA to AA-minus and to change the outlook for J.P. Morgan & Co. from "stable" to "negative."

"Once again, the major banks were on the wrong side of the market," said Ms. Azarchs.

She said the market's new volatility leads her to believe that, just as some huge profits chalked up by banks last year came from proprietary trading, many of this year's losses can also be attributed to such trading.

Swaps' Growing Share of Trading

"The riskiest and most volatile trading activity is proprietary risk taking, or trading for a bank's own account," said Ms. Azarchs.

She noted that derivatives, which in the last 10 years have become a popular tool through which banks hedge risk, now account for one-third to one-half of some banks' total trading income.

"It appears that proprietary trading has increased significantly," she said, "at least for some institutions. The larger players pulled ahead of the others by a wide margin during the last five years. These same firms suffered the greatest drop in trading income in the last quarter."

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