Pressure to accelerate reform of the banking industry is mounting as a star trader at the UBS investment bank remained in police custody in London amid allegations that he was at the heart of a rogue trading incident that has cost the Swiss bank about $2bn (£1.2bn).

Kweku Adoboli, 31, faced a night of questioning by officers from City of London police after being arrested at 3.30am when his managers became suspicious about his trading activities and alerted police and financial regulators. Police said he was being held on suspicion of "fraud by abuse of position".

Adoboli's father, a retired United Nations employee from Ghana, told Reuters in Accra that his "Godfearing family" was "heartbroken because fraud is not our way of life".

John Adoboli, who had worked in trouble spots around the world, said his son's girlfriend had confirmed his arrest. Adoboli Sr said he was calling his son's phone and he hoped he would "be granted bail soon so I can hear his side of the story".

The Nottingham University graduate's arrest coincided with the third anniversary of the collapse of Lehman Brothers and sparked a 10% fall in UBS's shares as it warned it might make a third-quarter loss.

Days after the government pledged to endorse ringfencing ideas put forward by Sir John Vickers's Independent Commission on Banking, senior political figures used the UBS incident as ammunition to encourage reform. Lord Oakeshott, the former Lib Dem Treasury spokesman in the Lords, said it exposed the "toxic banking risk" still in the system. Lord Myners, Labour's City minister during the banking crisis, warned taxpayers were still on the hook should a UK bank fail.

UBS, which had been fighting to restore its reputation after it became one of the biggest continental European casualties of the 2008 banking crisis, alerted City of London police at 1am on Thursday after it uncovering alleged "unauthorised trading" in the late afternoon and embarked on a wide-ranging internal investigation.

City of London police arrested Adoboli at the sprawling UBS office complex near Liverpool Street in central London, where around 6,000 people are employed. "The man was taken to a City of London police station for questioning and he remains in custody while officers are continuing to investigate this matter," police said.

The allegations facing Adoboli follow a series of rogue trading incidents in the financial markets. Nick Leeson is perhaps the highest profile after he was jailed in Singapore for bringing down Barings Bank in 1995 but there have been many others, including Yasuo "Mr Copper" Hamanaka and Jérôme Kerviel, a trader at Société Générale, whom the French authorities sentenced to three years in prison last year after he ran up losses of €4.9bn. Kerviel is appealing against the sentence.

Adoboli now risks entering that list if charges are brought against him. The bank would not confirm his position at the bank but his entry on LinkedIn, the social networking site, described him as director of exchange traded funds (ETF) and delta one trading at UBS.

This operation, in the equities division on the third floor of the UBS head office, was known internally as a profitable – and risk free – area of business. But it is understood that the trading desk was largely silent on Thursday

Staff were said to be stunned as Adoboli and his colleagues were regarded as "stars" by their colleagues and top management.ETFs are complex financial instruments that comprise a basket of investments intended to mimic a market's movements. They have become an area into which firms have expanded since the subprime mortgage crisis. Traders on so-called delta one desks try to make huge profits on tiny differences between prices.

The Financial Services Authority, the City regulator, is understood to have been alerted in the early hours and Swiss regulators were watching the situation closely.

The Serious Fraud Office may also become involved after it said it was "seeking discussions" with the bank, the City of London police and the FSA about how to proceed if fraud needed to be investigated. The SFO had already issued a warning about the "inherent dangers" of ETFs because of their complexity.

UBS is expected to reveal more details on Friday about the allegations facing Adoboli but the City was rife with speculation that he had been caught out by the sudden move by the Swiss National Bank last week to lower the rate of exchange of the Swiss franc.

On 6 September, the Swiss National Bank warned that it would no longer allow one Swiss franc to be worth more than €0.83 – equivalent to SFr1.20 to the euro. "The Swiss currency moved by 8% straight away which is a huge move for foreign exchange markets.

Probably a good guess as to where the loss came from, but at the moment we do not know," said Louise Cooper, analyst at BGC Partners.

Amid concerns about the health of Europe's banking system, Oakeshott told a debate on the Vickers reforms in the Lords that "this reminds us how much toxic banking risk remains in the system, and how urgent radical reform is".

He added: "The problem is that big investment banks are full of rogue traders: it is what they do."

Lord Myners, Labour's City minister at the time of the banking crisis, told the Guardian: "Until this government does something – either Vickers or Vickers 'plus' – the taxpayers remain on the hook."