Switzerland followed the lead of other European countries and the United States on Thursday by announcing it would inject billions of dollars into its banking system, chiefly to the benefit of its largest bank UBS AG.
The bank will receive up to $54 billion so that it can part with securities that have gone bad since the start of the worldwide financial crisis.
UBS, which racked up losses and writedowns totaling about 45 billion francs ($40 billion) over the past year, will also receive 6 billion Swiss francs ($5.29 billion) from the government in return for mandatory convertible bonds.
The measures will allow UBS to dispose of about $31 billion in high-risk assets linked to the U.S. subprime market and $18 billion in non-U.S. securities, by handing them over to a specially-created fund whose sole purpose is to sell them off.
The fund will be controlled by the Swiss National Bank but managed by UBS, and any profit will be shared equally between the two after a one-off payment of $1 billion to the SNB.
UBS will also have the opportunity to pass a further $9 billion in other securities to this fund, including the $5 billion worth of auction rate securities the bank was recently forced to buy back from U.S. investors.
The move marks a turnaround from earlier assurances that the Swiss banking system is safe and doesn't need government support of the kind seen elsewhere.
Eugen Haltiner, president of the Swiss Banking Commission, told a media conference in Bern that UBS had approached the government at the beginning of the week to discuss ways of overcoming liquidity problems.
Both UBS and rival Credit Suisse have been hit by the sudden drought on the credit market in recent days, Haltiner said, but added: "The rest of the Swiss banking sector is healthy and strong."
Nevertheless, because the two banks form the bedrock of the country's financial industry the government decided to trigger a pre-prepared emergency plan.
In return, the banks will have to accept tighter regulation in future, including new caps on the maximum debt they can incur and closer scrutiny of management pay and incentives.
"The state serves society, and there are moments when the state has to step in," said Swiss President Pascal Couchepin.
As part of the support package, the government said it will also raise private customers' bank deposit guarantee limit above the current 30,000 Swiss francs ($26,250). The exact level has yet to be determined, though Switzerland's acting finance minister, Eveline Widmer-Schlumpf, said the threshold of 50,000 euros ($67,400) recently agreed by the European Union would be taken as a guideline.
Credit Suisse said Thursday it would not take up the offer of government assistance for the time being, choosing instead to raise about 10 billion francs ($8.75 billion) on the open market. The largest amount would come from the Qatar Investment Authority, a government-controlled fund, it said.
While Switzerland's second largest bank has been less affected by the global financial turmoil, it said it expected to report losses of 1.3 billion francs ($1.12 billion) for the third quarter of the year.
UBS expects to report a profit of almost 300 million francs for the period — its first since the second quarter of 2007.
Thursday's announcement caused turmoil on the Swiss stock exchange, initially sending UBS shares 7.8 percent lower before investors took heart from the measures. By early afternoon the bank's shares were trading 2.5 percent higher at 20.58 francs ($18.23).
Credit Suisse shares were up 7.2 percent at 49.22 francs ($43.58) in Zurich.
Analysts at Zuercher Kantonalbank welcomed the fact that the government measures will allow UBS to dispose of a large part of its bad assets in one fell swoop, but warned that they come at a considerable cost to the bank in terms of loan repayments to the SNB.
They also noted that UBS has continued to suffer massive capital outflows as clients withdrew 84 billion francs ($74.1 billion) during the past quarter, indicating a further loss of confidence in the Swiss bank.
UBS will have to call an extraordinary shareholders' meeting in November — its third this year — to get approval for the refinancing measures. The bank has struggled to regain investor confidence in recent months after admitting that its so-called "integrated business model" and lack of management oversight were partly to blame for the risky investment strategies that caused the billion-dollar losses.