* UBS, CS should hold 10 pct top-quality capital-commission
* Should hold further 9 pct, can be in form of CoCo bonds
* Banks' structure should allow break-out of relevant parts
* Banks have until end-2018 to meet requirements
(Adds UBS CFO comments, updates shares, adds background)
By Sven Egenter
BERNE, Oct 4 (Reuters) - Switzerland tightened the reins on UBS and Credit Suisse on Monday, telling them to hold more capital than international rivals to prevent a bank failure crippling the country.
Regulators also see the new rules as a boost to confidence in the country's crucial private banking industry, which they say should be the focus for Swiss banks rather than the risky investment banking business which brought UBS to its knees.
But the so called "Swiss Finish" to global regulation could crimp the ability of the country's two biggest banks to compete in investment banking in Europe and on Wall Street.
The two banks should hold an equity Tier 1 capital ratio of at least 10 percent under proposals laid out by a government commission.
The new rules go well beyond the "Basel III" international standards set out three weeks ago, which require banks to hold a minimum core Tier 1 ratio of 7 percent, though recent reports suggested the level would be set even higher.
"It's twin edged. They are trying to deal with the too-big-to-fail issue, which is important domestically as a lot of people were very upset by the embarrassment caused by UBS," said Christopher Wheeler, an analyst at Mediobanca in London.
"And they want their banks to be the strongest in the world because that's how you stay number one in wealth management," Wheeler said.
Together, UBS and Credit Suisse hold more than four times the country's gross domestic product of $540 billion in liabilities on their balance sheets.
Switzerland has led the push for tighter banking regulations, after the near-collapse of UBS at the height of the global financial crisis triggered fears of a Iceland-style meltdown and forced the government to bail out the bank.
At 1358 GMT, Credit Suisse shares were up 0.9 percent, while UBS was up 0.3 percent. The European sector was up 0.1 percent.
INVESTMENT BANKING CULL
The report is a blueprint for Swiss banking regulation though the government still has to discuss it and kick off the lawmaking process in parliament.
The rules are also seen as a warning shot to banks in Britain, the United States and other countries where regulators are keen to force bigger banks to hold a capital surcharge.
Credit Suisse and UBS will need to hold a further 9 percent of other capital, which could be contingent convertible (CoCo) bonds, lifting the total capital ratio to 19 percent.
The so-called CoCo bonds would be turned into equity if capital ratios fall below pre-defined levels. Capital requirements could rise or fall depending on the banks' balance sheets or if their domestic market share increases.
Unlimited growth in investment banking would become more difficult, a top regulator said, throwing doubt on the integrated banking model of private banking and investment banking on which the two have built their business.
"An attractive integrated bank model with private banking and investment banking will remain possible. It will be qualitative investment banking, rather than investment banking aimed at extending the balance sheet," Swiss National Bank vice-chairman Thomas Jordan said at a media conference.
Banks have until 2019 to implement the changes, in line with Basel III standards, still under discussion.
UBS said it was well positioned to meet the new requirements and capital regulations. Chief Financial Officer John Cryan repeated it would probably not pay out dividends over the next couple of years and voiced scepticism about the viability of CoCos, saying it was unclear who would want to buy them.
Credit Suisse said it should meet the requirements within the timeframe as it builds up capital from profits and deploys CoCos.
Swiss banks already have to meet stricter requirements for capital and liquidity than their global peers, and regulators -- in particular the Swiss National Bank -- had always said rules would be tightened beyond international minimum standards. (Additional reporting by Katie Reid and Catherine Bosley in Zurich and Steve Slater in London; Editing by Will Waterman and David Holmes)