In the meantime, global central banks stepped up their efforts to bolster the flow of cash around the world to avoid the kind of seizing-up that happened back in 2008.

Shares in Credit Suisse fell more than 63% while UBS Group shares were last down 12.5%.

UBS on Sunday agreed to pay 3 billion Swiss francs ($3.23 billion) for 167-year-old Credit Suisse and assume up to $5.4 billion in losses. Swiss regulators orchestrated the deal over the weekend.

"The speed at which the 167-year-old institution deteriorated, when it was previously deemed too big to fail, has rocked the banking sector," said Susannah Streeter, head of money and markets at Hargreaves Lansdown.

"As the shockwaves continue to ripple, central banks have taken rear guard action to reduce the risks of contagion."

Faced with the risk of a fast-moving loss of confidence in the stability of the financial system, a cohort of central banks agreed on Sunday to bolster the flow of cash around the world.

As part of the deal with UBS, Swiss regulators forced Credit Suisse to write down around $16 billion of its additional tier-one debt - a part of its capital buffers.

JPMorgan said that although UBS stood to gain in the longer-term from the deal, the writedown of the AT1 bonds would impact other European banks.

"We believe this AT1 writedown by a systemically important bank will have negative implications for the wider European Banks' AT1 market as well as overall funding profile and Cost of Equity for the Banks," JPMorgan strategists Kian Abouhossein and Amit Ranjan said in a note on Monday.

An index of bank stocks fell as much as 6% in early trading on Monday - hitting its lowest since November - and by 0836 GMT was down 4.2%. The index has shed around 19% this month after the recent failure of several regional U.S. banks prompted a wider sell-off in bank shares.

Barclays cut its view on European banks to "neutral" from "positive" on Monday, citing likely increased regulatory scrutiny after Silicon Valley Bank collapse and UBS agreeing to buy Credit Suisse.

Deutsche Bank fell 6.2% in early trade and Commerzbank was down 4.6%. French banks BNP Paribas and Societe Generale were last down around 4.6% and 4.9%, respectively.

Standard Chartered shares spent early trading near the bottom of the FTSE 350 index along with Natwest and Barclays, all down between 4.2%-5.2%.

(Reporting by Lucy Raitano; Editing by Amanda Cooper and Angus MacSwan)

By Lucy Raitano