Shares of Swiss bank UBS fell 6 per cent in heavy volume sales after it reported losses of some $2 billion from unauthorised trading by one of its traders.
According to analysts, the loss would be manageable at the group level, but would hardly help sentiment and confidence in the bank's risk management.
The loss has prompted Swiss lawmakers to call for tougher capital requirements and for other businesses to be protected against risky investment banking operations.
According to Caspar Baader of the Swiss People's Party, the loss showed that investment banking was a high-risk field and it was important that the rest of banking operations were separated from systemically important functions.
The Swiss government is pushing for changes to banking laws, which would force UBS and Credit Suisse to hold total capital equal to at least 19 per cent of their assets, which would be almost double the requirement of rival banks in the US and Europe.
A proposal to break up the two Zurich-based banks or directly limit their size and activities, such as proprietary trading was turned down by a government-appointed panel.
According to Marianne Binder, a spokeswoman for the Christian Democrats, the case showed that security system could fail again and again and because of this, higher capital requirements were necessary for banks.
Analysts say the trading loss would almost certainly deal a blow to chief executive Oswald Gruebel's attempts to revive the investment bank after the division recorded 57.1 billion Swiss francs ($65 billion) in cumulative pretax losses in three years through 2009.
Tobias Lux, a spokesman for the Swiss Financial Market Supervisory Authority, said it was in close contact with UBS, which informed it immediately about the situation. He, however, declined to respond to a query whether Finma, which is tasked with monitoring risk management at Swiss banks, had launched an investigation.
UBS said in a statement today that it was still investigating the matter and no client positions were affected.