Why are stock markets still falling after UBS rescues Credit Suisse and should we be worried?

The rescue deal for the troubled Swiss banking giant comes after a tumultuous past couple of weeks for banks, ITV News correspondent John Ray reports

Stock markets globally have failed to be reassured by the emergency takeover of Credit Suisse and co-ordinated central bank action over the weekend as fears over a banking crisis remain at the fore. The rescue deal for the troubled Swiss banking giant comes after a tumultuous past couple of weeks for banks, sparked by the collapse of Silicon Valley Bank (SVB) in the US.

As concerns ramp up that other lenders worldwide may start to be affected, how worried should we be?

Why are markets down so heavily again?

Bank shares tumbled further after the UBS takeover of its crisis-stricken rival Credit Suisse on Sunday. This dragged markets deep into the red as trading opened on Monday morning.

Asian markets initially welcomed the deal, but anxiety soon bubbled to the surface as attentions turned to what happens next and the implications of the emergency takeover.

In the morning, shares in Hong Kong fell by more than 3% as the banking sector took a battering.

In particular, the concern is growing over high-risk bond holders in banks, after around $17billion (£14 billion) of more risky Credit Suisse bonds were wiped out as part of the deal.

What are the anxiety inducing 'high-risk bonds' and why are they important?

Swiss regulator Finma demanded on Sunday that Credit Suisse’s so-called additional tier one (AT1) bonds must be written down to zero under the deal.

These bonds are designed to make a lot of money, but can be completely wiped during a crisis, and according to the Financial Times, Credit Suisse had given out a lot of AT1 bonds.

The Bank of England has said holders of the erased higher-risk bonds “should expect to be exposed to losses”.

The move hammered home to investors just how easily these bonds being written off for any struggling bank.

But it has also raised concerns in the market over Finma’s move to put shareholders ahead of bondholders.

It has led to signs that investors may be scrambling to remove their investments in these types of bonds across the sector.

What has this got to do with Silicone Valley Bank collapsing?

While the two incidents are not directly linked, the double-hit to the banking world has caused a confidence crisis.

Credit Suisse has had a number of issues over the years, having incurred heavy losses and becoming embroiled in a string of fraud and misconduct scandals. These woes are well-known to investors.

After SVB collapsed on Friday, March 12, the worries quickly turned to embattled Credit Suisse last week.

This caused its share price to fall to its lowest level, prompting investors to sell shares in other banking stocks amid the panic.

Despite the £45 billion emergency loan from the Swiss National Bank to boost its balance sheet, concerns continued to grow and the speed of its decline has rocked the banking sector.

Nerves were frayed further as another US regional lender, First Republic Bank, seemed unable to stem client deposit withdrawals – despite 11 large US banks joining forces to pump in $30 billion (£24.6 billion) of deposits into the firm as part of a show of confidence in the group.

First Republic’s shares continued to plummet on Friday despite the cash injection and there are now worries over where the pain will emerge next in the banking sector.

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What are central banks doing?

Six central banks across the world, including the Bank of England and the US Federal Reserve, are working together to help contain the spread of the crisis.

The plan is to increase seven-day maturity US dollar swap lines between the US Federal Reserve and the other central banks from a weekly to a daily basis.

This is a process where lenders can access dollars from central banks and will boost the currency's flow into the financial system.

It is hoped the seven-day-a-week facility, which is starting on Monday and is due to run until at least the end of April, will boost market confidence over the health of other lenders.

The Bank of England and the US Federal Reserve are also in the spotlight this week ahead of interest rate announcements.

It is expected they may look to calm any further hikes in light of the mounting market turmoil.

What does all this mean for UK banks?

Banking shares in London have been hammered by the fears caused by Credit Suisse but Bank of England governor Andrew Bailey was quick to insist the financial system in the UK remains “safe and sound” and British banks are well capitalised, on Sunday night.

It is understood the Bank has ordered lenders to disclose their exposure to global bond markets.

This appears to be at the heart of many of the problems, particularly within US banks.

Will the crisis of confidence in banks get worse?

While experts believe the mammoth money cushions built up among banks will help avoid another full-blown crisis, there are worries about how this will affect their likelihood to lend.

Susannah Streeter at Hargreaves Lansdown said: “As risk aversion grips the sector, the worry is that overall banks will become more cautious in their lending, which could be another blow for already fragile housing markets in particular.

“Worries are rattling investors about what repercussions a potential lending squeeze will have on the global economy.”