The market chaos is going to hit Wall Street banks hard

The Dow plunged 1,000 points at the open on Monday morning, only to reverse and make up some of the losses.

The wild market moves may prove to be a short-term correction. The medium-term consequences for investment banks are real, however.

Big banks dependent on trading revenue and deal activity could will likely be hit by the spike in volatility.

Big banks aren't likely to take big trading losses, analyst Dick Bove told Business Insider, as regulation has lessened their ability to take large positions in the equity and bond markets.

But they will feel the effects of a drop-off in activity as hedge funds and other investors flee to the sidelines. Even a temporary absence of traders from the market place will put a damper on revenues.

"The trading side will be problematic," said Christopher Whalen, senior managing director at the Kroll Bond Rating Agency.

Initial public offerings, bond deals and M&A will also likely be put on hold in a rocky environment for equities.

One IPO was withdrawn due to market volatility on Monday and bond deals and M&A alike will be hampered going forward. Companies and their chief executives don't want to launch transformational transactions in an environment where the Dow can drop 1,000 points in no time.

"The last 10 days certainly could put a chill into big deals for the balance of the year," said one M&A banker.

The ongoing market turmoil also increases the likelihood the Federal Reserve will hold off from increasing interest rates in September. Federal Reserve chair Janet Yellen has stated that the central bank will hike the cost of capital this year, but she has also expressed concern over international markets that were in part responsible for the market rout on Monday morning.

That also spells bad news for banks. Bank stocks outperformed the market from spring through to the most recent bout of volatility, in part because the market expected the Fed to raise raise. The thinking is that that will mean banks can earn more from their core lending businesses. That is now in question.

Citigroup, Goldman Sachs, Morgan Stanley, Wells Fargo and JPMorgan were each down between 2% and 3% early trading on Monday.