Switzerland became the latest European country to rescue its embattled banking system yesterday with a $60 billion (£34.8 billion) bailout of UBS.

Credit Suisse, the country's other large bank, moved independently to shore up its battered balance sheet by raising SwFr10 billion (£5.2 billion) from three Middle Eastern shareholders.

As part of a drive to restore confidence to its financial system, the Swiss Government injected SwFr6 billion into UBS through an issue of convertible bonds. Once the convertible bonds turn into shares, the Government will assume a stake of up to 9.3 per cent, making it the second-largest shareholder behind Government of Singapore Investment Corp (GIC).

At the same time, UBS struck an extraordinary deal with the Government to transfer up to $60 billion of its toxic securities - including US sub-prime mortgages and student loans - into a new fund.

UBS will finance the fund with up to $6 billion of capital, and it will be managed by the Swiss National Bank (SNB), the country's central bank, The SNB will lend the fund a further $54 billion. The assets will be sold off or managed until they mature, with the State and the bank sharing a portion of any potential profits.

The package offloads all of UBS's remaining troubled assets while securing the opportunity for it to benefit if the securities recover in value.

Credit Suisse raised about SwFr10 billion through three asset sales, including treasury shares and convertible bonds, representing about 12 per cent of the bank when the bonds convert to shares. The buyers were Qatar Investment Authority, Olayan Group, a Saudi investment firm, and Koor Industries, an Israeli telecoms group whose stake will rise above the 3 per cent disclosure level. The assets transferred to the state-run fund have already been marked down to between 20 per cent and 70 per cent of their original value.

UBS has been the biggest European casualty of the credit crunch, writing off more than $38 billion against its exposure to the stricken American mortgage securities market. It has overhauled its executive team, bringing in Marcel Rohner as chief executive.

Mr Rohner said: “Our shareholders have borne the losses from this crisis. They now have the certainty that our risks related to these distressed assets have been substantially removed while still participating in the recovery of these assets.”

UBS shares lost more than 5 per cent, down SwFr1.01 to SwFr19.07. Existing shareholders will be diluted once the shares convert. Credit Suisse shares lost 0.87 per cent, down SwFr0.40 at SwFr45.50.

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