Revenue was up markedly from the second quarter, when banks reported $1.6 billion of trading revenue, as market disruptions led to a widening of credit spreads.
As credit spreads widened, the value of banks' trading liabilities declined and trading revenue increased.
Kathryn Dick, deputy comptroller for credit and market risk, said the value of trading revenue was inflated during the third quarter because of fair value accounting rules that went into effect at the end of 2007.
The rules require banks to mark derivative contracts to current market values each quarter.
"I don't think they had a really strong quarter; they had a good quarter," Dick said about the banking industry's trading revenue. "(The gain) was largely due to accounting purposes, not necessarily due to client flow or customer demand."
Dick said credit spreads have significantly narrowed during the fourth quarter as investor confidence in credit quality has increased.
"Credit spreads have come in dramatically, which means those (third-quarter) gains will be reversed," she said.
The comptroller's office, which oversees most big U.S. commercial banks, also said the notional amount of derivatives held by the industry -- the amount that generally does not change hands -- decreased by $6.3 trillion in the third quarter to $176 trillion.
However, credit derivative contracts increased 4% to $16 trillion.
"The uncertain credit environment created demand for credit hedges, particularly for counterparty credit risks," Dick said.
The OCC said the net current credit exposure for the industry increased $30 billion, or 7%, in the third quarter to $435 billion.
The agency uses that figure as the primary means to measure credit risk in derivatives activity. It said the largest five U.S. banks hold 97% of the total notional amount of derivatives.
The OCC said national banks reported strong client demand and increased client revenues due to wider bid/offer spreads and market disruptions such as the U.S. government takeover of mortgage giants Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500) in September and the failure of Washington Mutual (WAMUQ) in the same month.
The agency also said derivative contracts remain concentrated in interest rate products, which account for about 78% of total derivative notional values.
(Reporting by Karey Wutkowski; Editing by Steve Orlofsky and John Wallace)
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