When Bank Ceiling Drops, So Does Floor

In some ways, this should be a great time for the biggest banks.

Debt-trading volumes are picking up. Corporate clients are paying bigger fees to borrow and acquire one another. Markets are becoming more volatile, which traditionally means more lucrative arbitrage opportunities.

And yet bank stocks and bonds are plummeting, with investors showing growing concern that financial firms will suffer so badly that they'll be unable to repay their debt. What gives? It doesn't seem as if the industry is heading toward a repeat of the banking crisis of 2008, which led to Lehman Brothers' demise. Aren't these banks safer than they used to be in the face of new, risk-curbing regulations?

One theory for the selloff in the bonds and derivatives of banks, particularly European ones including Deutsche Bank, HSBC and Standard Chartered, has been that they have substantial exposure to China and oil and gas companies, leaving them with an unknown and potentially huge pile of souring loans. But there's more to the story.