THEY CALL THEM JUNIOR

They call them junior for a reason.

Monday was a bad day for European banks, and Tuesday didn't get any better, a bad day that spilled over into financial sectors elsewhere. Some called it a rout. Others the truth coming home. One official even denied protecting bank profits was his job. Here's that official's initials, Mario Draghi.

Many of those banks have names and they're just not the little guys. Deutsche Bank, the German behemoth, saw it shares drop nearly 10%, France's BNP Paribas and Italy's UniCredit all shed more than 5%. The usual reasons for Monday's gloomy outlook, as the WSJ noted, "...don't cut it as an explanation for the 20% drop in bank shares this year. Those factors have been around for a while."
What factors are that--slow growth and plunging energy prices?

Insurance costs money. In bad times it cost more, like all those seemingly insignificant traffic tickets you got last year. To insurers you represent instability, risk; that causes premiums to go up. Junior bonds are lower down the corporate debt food chain. When their prices head south, the costs of insuring them head north. At some point the trip north becomes too expensive, not worth the cost.

They're called junior for a reason. It's spelled risk. But there's an irony here, one that only bureaucrats and regulators could conjure up. Those low rated junior bonds can count as capital to meet certain reserve requirements, not the highest quality of capital however. When wipe out time rolls around these are among the first to go.

The bottom line here, one seemingly those central banking touts never seem to get, is negative interest rates are a two-way thoroughfare and can cause as much financial havoc as they do of hoped for recovery. As European bank stocks continue their selloff, concern spreads. Overall European bank stocks are down 27% so far this year with Deutsche down nearly 40%. And so too is the debt instruments created by restrictive regulations that might sound good when being dreamed up but in the real world carry serious unforeseen risks.

Like a bad case of measles the contagion is spreading. American banks are also down 18%, nearing that 20% marker some call a bear market. Banks and those who regulate them are like lemmings. If these risky junior debts are sitting on the balance sheet of one bank, it's certainly sitting there on others.

Correlation: Investor panic.