UBS has kicked off an internal investigation into the catastrophic failure of its risk systems after rogue equity trades cost the Swiss bank $2.3 billion, raising the pressure on top management.

UBS said its board of directors had set up a committee chaired by independent director David Sidwell, former chief financial officer at Morgan Stanley, to conduct an independent investigation into the trades and the bank's control systems.

External expectations are that the investigation should take weeks and not months, a UBS insider told Reuters. The internal investigation will be coordinating with the regulators on their probe.

The Swiss bank stunned markets on Thursday when it announced unauthorized trades had lost it about $2 billion, a figure it increased to $2.3 billion on Sunday. London trader Kweku Adoboli was charged on Friday with fraud and false accounting dating back to 2008.

Chief Executive Oswald Gruebel, who was brought out of retirement in 2009 to turn the bank around, said the alleged fraud would have consequences for strategy and possibly also for himself.

UBS said the trader concealed unauthorized speculative trading in various S&P 500, DAX and EuroStoxx index futures over the last three months by creating fictitious hedging positions in internal systems.

The UBS source said there was no indication that others were involved, and the global synthetic equities team in which Adoboli worked was still operating, but added that members of the team would have to stop trading while answering questions as part of the investigation.

The loss is a heavy blow to the reputation of Switzerland's biggest bank, which had just started to recover after its near collapse during the financial crisis and a damaging U.S. investigation into its aiding wealthy Americans to dodge taxes.

The UBS explanation about how the loss was incurred is similar to those speculated in the market on Friday but in the cold light of day remains just as shocking, said Peter Thorne, analyst at Helvea.

By 1330 GMT UBS shares were up 0.8 percent to 10.2 francs, outperforming a 2.9 percent slide on the European banking stocks index. The European banking index gained 3.9 percent last week, while UBS lost 2.7 percent.

Traders said the shares were playing catch-up after last week's pummeling, and that the more considered figure of $2.3 billion was a cap on the losses.

ANGRY BANKERS

The new crisis has prompted calls for UBS's top managers to step down and for its investment bank to split into a separate unit to shield its core wealth management business.

UBS private banking personnel is pissed, said an investment manager whose company holds shares in UBS. I talked to several senior private bankers, and one told me how he spent last week with compliance arguing about a 1,500-franc accounting difference ... And then some junior investment banking trader loses 2 billion.

In addition, it creates serious ill will among their clients. So internally there will be some momentum to resize IB.

Swiss politicians are debating tough new financial regulations on Monday and are also likely to press UBS to scale down and split off its investment bank unit.

In Britain, where similar reforms are in the works, Business Secretary Vince Cable said the UBS scandal illustrated the need for change.

If there were any doubts about the need for radical reform, the UBS rogue trader has dispelled them, Cable told delegates at his Liberal Democrat party's conference in Birmingham, central England.

UBS is now widely expected to speed up an overhaul that had initially been planned for announcement on November 17, though big shareholders have signaled that they could wait until that date while the bank completes its internal investigation, according to the inside source.

Along with Gruebel, Carsten Kengeter, head of the investment banking unit, may be in the firing line.

We estimate that the investment banking chief Carsten Kengeter, who was appointed in April 2009 with a mission to build up a leading fixed income franchise and promoted in November 2010 to become solo divisional head, will be sacrificed after this scandal, said Kepler analyst Dirk Becker.

Jerome Lussan, CEO of investment management consultancy Laven Partners, added: Regulation clearly states that risk management is the responsibility of senior management ... The real problem is that risk management is seen as a cost and is not respected in the typically impatient bonus-hungry culture.

UBS said it had covered the risk of further losses from the unauthorized trades, and its equities business was again operating normally within previously defined risk limits.

It said the trader had allegedly concealed the fact his trades violated UBS risk limits by executing fake exchange-traded funds (ETFs) positions.

ETFs are index funds listed on an exchange and can be traded just like regular stocks. They try to replicate index performances and offer lower costs than actively managed funds, but regulators have warned about risks from some complex ETFs.

(Additional reporting by Martin De Sa'Pinto and Catherine Bosley in Zurich, Dominic Lau in London and Tim Castle and Mogammed Abbas in Birmingham; Writing by Sophie Walker; Editing by Will Waterman)