Bank of England and Federal Reserve claim banking systems are secure

On Monday, the UBS acquisition of Credit Suisse was the focus of global markets, according to Victoria Scholar, Head of Investment at Interactive Investor.

Scholar explains how despite the UBS takeover of CS which comes as a "relief", European banks experienced "painful losses" on Monday. Credit Suisse share prices "opened down by more than 60 per cent" on Monday, with UBS "down by over 12 per cent."

FTSE 100 banks including StanChart, Barclays and NatWest, are "languishing at the bottom of the UK index." Furthermore, "Deutsche Bank, Commerzbank and BNP Paribas are trading sharply lower with German banks understood to have direct financial exposure of at least $11.5 billion to Swiss banks."

The impact of the UBS takeover of Credit Suisse also comes after the collapse of the Silicon Valley Bank in the US.

Market turbulence comes ahead of the Bank of England's (BOE) decision on whether to raise interest rates again tomorrow. Today, the US Federal Reserve (the Fed) also considers whether to raise interest rates.

The UBS Takeover of Credit Suisse

Scholar explains how in recent months, "client withdrawals, a sliding share price and existential angst" have been a crisis hanging over Credit Suisse. According to the Swiss Financial Market Supervisory Authority (FINMA), previous attempts by Credit Suisse to "stabilise the situation" have failed to "restore confidence" in the bank.

Therefore, having acknowledged "material weakness" in its financial reports, and without financial support from its biggest shareholder the Saudi National Bank, the Swiss Federal Department of Finance, the Swiss National Bank and FINMA intervened to force a merger with UBS to generate stability in financial markets.

According to Scholar the arrangements also include the provision of 100 billion Swiss francs to the "merged entity" by the Swiss National Bank. This is intended to "offset the risk of financial contagion."

The takeover by UBS cost 3 billion Swiss francs (£2.65 billion). The losses, taken on by UBS, amount to $5.4 billion. Notably, FINMA decided to write off Credit Suisse tier-1 bonds ("CoCo bonds") worth $17.24. Holders of these bonds are now burdened with "hefty losses" according to Scholar.

UK and US banks are safe according to the Bank of England and the Federal Reserve

The BOE has welcomed the actions of the Swiss authorities and the takeover of Credit Suisse by UBS, stating that the UK banking system "is well capitalised and funded, and remains safe and sound."

In an official statement by the Fed, Secretary of the Treasury Janet L. Yellen and Federal Reserve Board Chair Jerome H. Powell welcomed "the announcements by the Swiss authorities today to support financial stability." They go on to say that "the capital and liquidity positions of the U.S. banking system are strong, and the U.S. financial system is resilient."

In response to the crisis at Credit Suisse, central banks have coordinated currency swaps to mitigate the risk of contagion.

These central bank assurances come ahead of decisions by the BOE and the Fed on whether to put up interest rates. Previously, it was reported there was a likelihood that the BOE would put up interest rates again by 25 points to 4.25 per cent. However, the recent market turmoil has thrown any certainty over this into doubt. Similarly, opinion is divided amongst traders and economists on whether the Fed will decide to put up interest rates.