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Two Swiss flags fly above a logo of the UBS on the top of the Swiss banking giant headquarters, on November 15, 2008 in Zurich.FABRICE COFFRINI/AFP / Getty Images

Swiss financial giant UBS AG faces a new crisis after it revealed a massive $2-billion (U.S.) trading loss, which the bank pinned on a rogue trader operating without approval from management.

Under a new chief executive officer brought in to steer the bank after heavy losses in 2007 and 2008, UBS told investors it was shielding itself from risk that could blow up its balance sheet. That included scaling back its proprietary trading business, where banks use their own funds to place bets on financial markets.

But the bank's efforts to portray itself as a more conservative operator blew up in spectacular fashion Thursday. The embarrassment came to light after 31-year-old Kweku Adoboli, a trader at the bank's London offices, was arrested at his home at 3 a.m. on suspicion of fraud. UBS has said little about the charges. Mr. Adoboli started at UBS in 2006, and most recently worked at the bank's Delta One division, a fast-growing area that undertakes operations similar to the proprietary trading that regulators in several countries want to limit or ban.

The announcement came three years after Lehman Brothers went bankrupt, sparking the most tense period the banking industry had seen in decades. And many observers say this current trading scandal indicates that banks have not yet fully absorbed the lessons from that crisis. Beyond damaging the credibility of UBS at a delicate time, the fallout could be widespread for the European banking sector, and may put more pressure on regulators to again tighten the trading rules for banks. It could also have a direct impact on the bank's Canadian operations, which has already reduced staff this year, should it opt to cut deeper into its global trading operations.

UBS did not disclose the nature of the trade, but executives told staff in an internal memo that the loss was "a case of unauthorized trading." Analysts figure it will likely push UBS to a $500-million loss in the third-quarter, from an expected profit of about $1.5-billion.

Mr. Adoboli, the son of a United Nations official who was born in Ghana and moved to Britain at the age of 10, posted a seemingly ominous message on his Facebook page more than a week before his arrest. "Need a miracle," he wrote on Sept. 6, though it was not immediately clear if he was referring to the mounting losses UBS would have been incurring.

Unconfirmed reports circulated in Europe that Mr. Adoboli had taken a long position related to the rising value of the Swiss franc, which then became impossible to unwind after the Swiss government decided to cap the rise of its currency. Reached in Ghana by Reuters, the trader's father, John Adoboli, said the family was "heartbroken" by the news, but he had not yet spoken to his son. "Fraud is not our way of life," he told the news agency. "I am hoping he'd be granted bail soon so I can hear his side of the story."

In April, 2008, when UBS and other large multinational banks were being rocked by their exposure to subprime mortgage securities, UBS issued a seminal report on risk management. The bank publicly detailed the failings in its own systems that had led to significant troubles at its investment bank – a report that was read by bank executives around the world.

As misguided credit bets went on to cost UBS tens of billions of dollars, the bank continued to make disclosures about what went wrong and how it was fixing its practices as the crisis ensued. But questions have lingered in recent years about UBS's investment banking unit, with some shareholders arguing that it might be better to shutter it entirely.

The superintendent of Canada's banking regulator, Julie Dickson, said the problems at UBS underscore the need for close scrutiny of risk exposures. "It's a useful reminder of the importance of risk management controls within institutions and the continuing supervisory oversight over those controls," she said.

Banks use a number of techniques to double-check the books of their traders, from forcing traders to take periodic vacations and allow a fill-in to take over, to using independent third-parties to verify the pricing.

While UBS is strong enough to absorb the loss, it faces a bigger task trying to rebuild its credibility. Société Générale SA, which lost €4.9 billion ($6.8-billion) three years ago in France's biggest trading scandal, is still dealing with the reputational fallout, which has forced the bank to scale back its investment banking division.