The Swiss government is to inject 6 billion francs (€3.9 billion) into the country’s largest bank UBS.
Shares in UBS AG recovered from sharp early falls as investors weighed up the latest example of the dramatic impact of the credit crunch on leading banks.
UBS will get a 6 billion francs capital injection from the Swiss government and will unload up to $60 billion of illiquid securities and other assets to a separate fund entity under an agreement with the Swiss National Bank.
The Swiss government will emerge with approximately 9.3 billion francs of UBS's share capital, which it reserves the right to sell to other investors.
The country’s second biggest bank Credit Suisse (CS) will raise about 10 billion francs (€6.5 billion) from investors including the Qatar Investment Authority, already a major shareholder.
Governments around the world have been taking emergency measures to prop up their banks and avoid the credit crunch turning into a lengthy global economic depression, while banks have been seeking funds to insulate themselves from the gathering crisis.
UBS shares recovered from a similar early setback to be unchanged at 20.08 francs, while European banks fell 3 percent.
In a statement UBS said the transaction meant it had capped future potential losses from illiquid assets and had removed a material degree of risk from its balance sheet.
"We applaud this move as it should relieve fears about further writedowns and eventually stem money outflows in its core wealth management franchise," analyst Pangiotis Spilopoulos at banking group Vontobel said.
UBS had already been forced to make a total of $42 billion of writedowns on toxic assets due to the credit crisis, more than any other European bank, and is slashing thousands of jobs, but it has also already raised $30 billion of fresh capital.
It has launched a restructuring designed to help it turn the corner, involving the separation of its wealth management from its investment banking arm, and has said it expects to report a small profit when it reports third quarter results on November 4th.
But it has denied plans to sell off the investment banking arm saying the combination of an investment bank with wealth management remains the right model.
Shares in CS, which also announced a net loss of about 1.3 billion Swiss francs for the third quarter after making 2.4 billion francs in fresh writedowns, were down 1.2 per cent at 45.34 francs earlier, having initially tumbled more than 9 per cent.
Credit Suisse said it had increased its Tier 1 capital - a key measure of a bank's financial strength - by about 10 billion francs through the cash injection from several major investors, including a subsidiary of the Qatar Investment Authority.
It also said it expected a net loss of around 1.3 billion francs in the third quarter, including a pretax loss of around 3.2 billion francs from investment banking.
The bank said it had taken writedowns of approximately 2.4 billion on leveraged finance and structured products businesses and due to "exceptionally adverse trading conditions" in September.
However CS, which in July posted a better-than-expected net profit of 1.2 billion Swiss francs due to asset writedowns of just 22 million, said it was strongly capitalised and the latest measures meant it immediately exceeded revised regulatory requirements.