Switzerland's two biggest banks would have to be rescued by its creditors and shareholders before the government steps in with a bailout, the country's financial watchdog recommended Wednesday.

The preferred option for UBS AG and Credit Suisse would be a government-led "bail-in," Swiss financial regulator Finma proposed in a strategy paper on what to do if either of the two Zurich-based banks were to collapse.

Under a bail-in, Finma says it would distribute losses "across a range of creditor groups" of the bank and, if applicable, its holding company. That would include first shareholders, then bondholders and, as a last resort, could include uninsured deposits of about 300 billion Swiss francs per bank.

The banking group also might be broken up and some assets restructured, sold off, wound down or liquidated to preserve key operations, Finma said.

If it's clear a bail-in won't work, the Swiss regulator said it would step in to protect the critical functions of the bank. It said, however, that "it is impossible that the entire bank can be rescued."

UBS and Credit Suisse are major financial institutions with a significant place in global investment banking, private banking and corporate advisory. Each is on the list of 29 "global systemically important banks" that the Bank for International Settlements — the global central bank for central banks — considers too economically important to be allowed to fail.

Both are profitable, but the Swiss government doesn't want a repeat of UBS' $60 billion bailout in 2008, when it was hit by massive U.S. subprime mortgage losses.

The ultimate aim, Finma says, would be to "ensure the continuity or orderly wind-down of systematically important functions, prevent a negative impact on the global and national financial systems and the relevant economies and avoid recourse to state aid as far as possible."

UBS, the largest bank, has struggled to return to profitability and to restore its reputation after the heavy subprime losses, an embarrassing U.S. tax evasion case that blew a hole in Switzerland's vaunted tradition of banking secrecy, a $2 billion rogue trading scandal and a wave of restructuring.

It said last month the U.S. government had agreed in principle to settle a lawsuit against UBS that seeks to recoup more than $900 million in losses from mortgage-backed securities. The bank also reported that net profit jumped 62 percent in the second quarter of the year, but was still way down from the comparable period in 2012.

Credit Suisse, the second-largest, has faced similar structural problems as UBS amid global financial turmoil and weakened trading, while also facing pressure on its cross-border business from U.S. and other foreign tax authorities.

Its second-quarter profits, posted last month, showed a 33 percent rise from a year ago, driven by solid returns from its scaled-backed investment banking division as well as other cost-cutting.