The government has announced a rescue package for the country's financial system that will inject cash into its biggest bank, UBS.
The Swiss National Bank has agreed to put SFr6 billion ($5.23 billion) into UBS, in a move that aims to strengthen the bank's capital base and reduce its balance sheet.
The surprise move by the cabinet, the Swiss National Bank (SNB) and the Swiss Federal Banking Commission was announced on Thursday morning.
It includes lending UBS up to $54 billion so that it can part with securities that have gone bad since the start of the worldwide financial crisis.
Based on an agreement with the SNB, UBS will transfer up to $60 billion of assets to a newly created fund entity and will capitalise the fund with equity of up to $6 billion.
The SNB will finance the fund with a loan of up to $54 billion, secured on the assets of the fund, taking over control and ownership of the entity.
The government said the package would also include raising account holder protection for all Swiss banks customers above the current threshold of SFr30,000.
"The cabinet is confident that this package of measures will contribute to the lasting strengthening of the Swiss financial system," said a finance ministry statement.
"The resulting stabilisation is beneficial for overall economic development in Switzerland and is in the interests of the country as a whole."
UBS has suffered losses and write-downs totaling about SFr45 billion over the past year.
UBS CEO Marcel Rohner said: "This transaction gives us comfort.
"The extremely difficult market environment led us to accelerate our risk reduction with a definite move. Our aim is to protect our clients form the impact of the crisis to the fullest extent possible and to provide our shareholders an opportunity to renew confidence in the bank."
Meanwhile Credit Suisse welcomed the measures, but announced it was expecting to post a loss of SFr1.3 billion for the third quarter.
The country's second-largest bank said it had "decided not to participate at this time" in the stabilisation measures. It based this on the relatively low level of affected assets in its portfolio and its good access to capital markets.
UBS and Credit Suisse shares fell 7.8 per cent and 6.1 per cent respectively on the Swiss stock exchange after the anouncement. The Swiss Market Index of leading companies dropped 3.86 per cent after opening on Thursday.
swissinfo with agencies
At the start of the week the Swiss government said that it did not need to follow the example of many other countries, which had raised massive amounts of taxpayers' money to bail out stricken banks.
Following the United States' $700 billion (SFr790 billion) rescue package earlier this month, Britain announced a £37 billion (SFr73 billion) cash injection while Germany was poised to prop up its ailing financial system with a €470 billion (SFr724 billion) hand out.
Spain said it would provide up to €100 billion of guarantees for new debt issued by commercial banks in 2008. Norway and Portugal have also followed suit with their own bail out cash packages.
Germany, New Zealand and the United Arab Emirates are the latest countries to guarantee all bank deposits.
Iceland is close to bankrupcy.
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