NatWest blamed the loss on a rogue trader who left the firm last December and said another senior trader who should have picked up the error had been suspended. It is understood that Neil Dodgson, senior sterling swap options trader, had been sent home pending the outcome of an internal inquiry while Kyriacos Papouis, who resigned to move to Bear Stearns, had been reported to the Securities and Futures Authority.
NatWest would not elaborate on the nature of the "mispricing" but it is thought to have involved the deliberate misreporting of prices in order to inflate the profits on deals. The errors would not necessarily have resulted in personal gain for the trader.
It is thought Mr Dodgson was suspended pending an inquiry into his failure to notice irregularities in the trading activities of Mr Papouis, who he supervised.
One trader familiar with the interest rate options market said it would be relatively easy to inflate profits by pounds 50m and it was not thought that the problem necessarily pointed to more systematic fraud.
NatWest's shares are certain to come under pressure on Monday thanks to the timing of the announcement just after the market closed yesterday. Traders were speculating on a fall of at least 20p on yesterday's close of 758.5p.
Only three days ago, when NatWest announced profits of pounds 1.12bn for 1996, down from pounds 1.75bn, it made no mention of problems in its investment banking arm. It did, however, point to a sharp rise in staff costs from pounds 510m to pounds 726m.
Martin Owen, chief executive of NatWest Markets, said the higher figure reflected the costs of acquisitions but the coincidence of the rise with yesterday's announcement is sure to focus attention on the risks to financial institutions of staff whose pay packages are highly geared to performance- related bonuses.
The Bank of England is expected to draw attention to the dangers of the City's culture of high bonuses when it issues a discussion paper on Monday on "Remuneration and Risk". It will say: "Many employees in the financial sector receive a significant part of their income in the form of profit- related bonuses. They therefore have a personal stake in the outcome of the activities they carry out on behalf of their employer. If these employees have significant discretion, then a firm's overall risk profile may be influenced by its employees' attitudes to risk."
The Bank's comments follow a diatribe earlier this week by Donald Gordon, chairman of the financial services group Liberty International, in which he warned of the risks inherent in "massive surge in over-incentivisation of personnel within the investment banking and capital market sectors".
A spokesman for the Securities and Futures Authority said simply: "I can confirm that NatWest Markets have reported these matters to us and we are studying them."
NatWest's debacle follows some spectacular scandals involving rogue traders. Nick Leeson sank Barings, Britain's oldest merchant bank, with trading losses of over pounds 800m. Yasuo Hamanaka, Sumitomo's "Mr Copper", managed to cause losses of over pounds 1bn following years of unauthorised trading.