Global Financial System Faces Turmoil as Credit Suisse Acquisition by UBS Triggers Market Anxiety and Flight to Safety

European and US stocks fell as concerns over the health of the banking system grew following the emergency sale of Credit Suisse Group AG to UBS Group AG. The sudden acquisition, coupled with the collapse of Silicon Valley Bank, has prompted investors to seek safer assets, resulting in gains for treasuries and gold. The Stoxx Europe 600 index dropped by 0.7%, while the S&P 500 and Nasdaq 100 futures also experienced declines. A measure of Asian shares fell by over 1%.

Policymakers have been working to boost confidence in the global financial system, with the Federal Reserve and five other central banks announcing coordinated action to increase liquidity in US dollar swap arrangements. As the market awaits the Fed's rate decision on Wednesday, analysts predict the peak in the rates cycle to be lower than previously anticipated due to the recent financial instability.

Swiss bank Credit Suisse's riskiest bond investors, holding $17 billion in AT1s, are expected to lose their investments as the bonds become worthless due to public funds being used for the rescue. The Swiss National Bank is offering liquidity assistance to UBS, while the government is providing a guarantee for potential losses from assets UBS is taking over. The AT1 wipeout could result in higher funding costs for European banks in the future.

Amid growing concerns about financial stability, the Swiss National Bank, Swiss Financial Market Supervisory Authority, and the Swiss government worked together to facilitate the takeover of Credit Suisse by UBS, with a loan of up to 100 billion Swiss francs ($108 billion) being provided as support. The Federal Reserve has also implemented support measures in response to fears surrounding the stability of the financial system.

Investors are now focused on the Fed's upcoming meeting and interest rate policy decision. Many expect a 25 basis point rate increase, as the central bank aims to strike a balance between cooling the economy and supporting the stability of the financial system.