The Kuwait central bank was forced to step in to support Gulf Bank, which was hit by losses from trading in currency derivatives after the dollar rose, prompting the government to announce it would guarantee local bank deposits.
The actions spooked investors.
Gulf markets tumbled to multi-month lows on Sunday.
The losses followed those on global markets on Friday as investors dumped risky assets.
The latest moves by
Gulf Arab nations have so far adopted separate policy responses to the crisis, which has frozen interbank lending and panicked investors. Some
The Kuwaiti government also set up a special task force on Sunday headed by the central bank governor to deal with the impact of the financial crisis.
"The market is looking for confidence-building measures. They shouldn't take actions that damage another country's deposit base," said John Sfakianakis, chief economist at SABB bank, HSBC's Saudi affiliate.
"As they face this global uncertainty, the central banks need to have a uniform position."
In the past, such requests have led to ministerial resignations and brought down the government.
Adding to the negative sentiment, oil prices dropped nearly $4 a barrel in
In the oil-rich Gulf, investors fretted that falling crude prices and an economic downturn would take a heavy toll on growth in the region, which has been booming on the back of a five-fold increase in oil prices since 2002.
"Sentiment is so negative that fundamentals are totally being ignored," Shakeel Sarwar, head of asset management at Bahraini investment bank SICO, said. "The focus is purely on what's happening on the international markets.
"The fundamentals of the region have deteriorated over the past two to three months as oil prices decreased. But oil prices above $50 are still comfortable for the region to finance infrastructure projects."
GULF BANK PROBLEMS
Gulf Bank, Kuwait's fifth-largest bank by market value, had suffered two straight quarters of falling profit due to bad debt and the impact of weak markets on its investment portfolio.
On Sunday, the central bank halted trading in the lender's shares and appointed a supervisor to oversee its treasury, foreign exchange and financial markets trading operations. The central bank said the stock would be suspended until the probe was completed.
Gulf Bank ran into problems after some of its clients refused to cover their losses from currency derivatives trades, leaving the bank to foot the costs until a deal was reached.
National Bank of
"We don't know yet. Dabdoub can say what he wants," Thunayan said, speaking in front of the bank's headquarters where a crowd gathered, adding that deposits were safe.
He said the full extent of losses would not be known until Monday, when the bank closes its currency positions abroad.