WASHINGTON - Trading revenues plunged 21% at commercial banks in the second quarter to $3.03 billion, but that is still a huge figure. The quarterly revenue record was set in the first quarter at $3.84 billion.

According to the Office of the Comptroller of the Currency's quarterly derivatives report released Wednesday, interest rate swaps accounted for the bulk of the $800 million decline. Swaps revenue dropped almost 42%, to $993 million in the second quarter, while revenue from foreign exchange contracts dropped $2 million, to $1.3 billion. Revenue from equity, commodity, and other trading activities increased $19 million, to $1.05 billion during the quarter.

Of the top-seven banks in this business, only First Union saw its revenues from interest rate contracts increase. Chase Manhattan Bank and J.P. Morgan suffered the worst declines while revenues dipped at Bank of America and Bank One. Revenues at Citibank and FleetBoston were flat.

The notional amount of derivatives holdings at commercial banks jumped 4.5%, to $39.3 trillion, a new high, the Comptroller's Office reported. Interest rate contracts comprised most of the growth, increasing 4.3%, to $31.4 trillion. The notional amount of foreign exchange contracts grew $348 billion, to $6.5 trillion.

"Contract volumes showed strong growth as bank customers managed risk positions in an environment characterized by rising interest rates and volatile and more uncertain market positions," said Mike Brosnan, deputy comptroller for risk evaluation.

Though bank losses tied to derivatives remain miniscule, Mr. Brosnan warned that credit risk remains a potential threat to banks in a volatile interest rate market.

Total credit risk from off-balance sheet derivatives contracts dropped 26.5% in the second quarter, to $418 billion, though "it is still a big number on anybody's chart," he said.

According to Mr. Brosnan, the decrease in credit risk was primarily the result of bilateral netting, which occurs when two banks agree to settle contracts at net value. Bilateral netting reduced current credit exposures by 65% in this quarter, he said.

However, Mr. Brosnan explained that as the market changes, "only so much benefit will come from netting. … Credit exposures will continue growing in terms of dollars and capital," he said.

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