THE reputation of the City, London's financial district, suffered yet again yesterday after major British bank NatWest revealed it had failed to detect losses by a junior trader for more than two years.

The scandal comes less than a fortnight after the Bank of England deputy governor, Mr Howard Davies, warned that the system of generous performance linked bonuses in the City was encouraging dealers to take dangerous risks with their employers' capital.

National Westminster Bank said that its 1997 profits would be cut by £77 million sterling because of errors made since late 1994 by a derivatives trader from its NatWest Markets investment banking subsidiary.

This is higher than the £50 million pound "back hole" the bank announced on February 28th, when NatWest first revealed the losses in its interest rate options business.

NatWest also suspended four senior staff in charge of the bank's derivatives operations, following suspension of the trader's immediate superior last month.

And it cancelled the bonuses of these five managers and of a number of other employees, worth a total of £8 million.

The chief executive of NatWest Markets, Mr Martin Owen, meanwhile opted to take a cut of £200,000, or 40 per cent, in his 1996 bonus.

The management of NatWest expressed regret at the failures in their control system, which meant they did not detect the losses earlier.

"It is extremely regrettable that the losses and the mis pricing have gone undetected for so long. Although confined to one area, this is a significant setback for NatWest Markets," admitted the chief executive of NatWest Group, Mr Derek Wanless.

The trader responsible for the losses, Mr Kyriacos Papouis (30), had left the bank last December, to take up a job at US investment bank Bear Stearns.