UBS is the first bulge bracket investment bank to make drastic strategic changes since the financial crisis, but few would bet on it being the last. Other banks, notably European rivals Deutsche Bank and Barclays, are breathing a sigh of relief at the retreat of a competitor in a number of markets, but sources say they are also watching closely to see if UBS’s gamble pays off.

The Zurich-based bank said on October 30 that it was largely withdrawing from fixed income trading, reducing its funded balance sheet by Sfr300 billion ($319 billion) or a third over three years, and cutting headcount across the group by 10,000 or 16 percent of the total. Some 2,000 front office investment bankers will be axed. It’s a bold step.

“There has to be an element of doubt about whether you can run a successful investment banking division and equities business without fixed income, but strategically it makes sense to allocate capital to the strongest parts of the bank such as wealth management,” says Andrew Stimpson, banks analyst at Keefe, Bruyette & Woods in London. This is a doubt shared by former group CEO Oswald Grubel, who told Institutional Investor in an interview in February 2011, “you cannot run a global bank without something as basic as fixed income trading.”

The reasons cited by CEO Sergio Ermotti for the shift in strategy, however, could apply to a number of the leading banks. In a conference call with analysts on October 30, Ermotti said that many areas of fixed income “have been made uneconomic by changes in regulation and in the markets.”

Higher capital requirements now makes capital-intensive fixed income business less attractive. UBS faces particular challenges as a Swiss bank since it is required by regulators to reach a core tier 1 capital ratio of 10 percent by 2019, higher than Basel III’s 7 percent. And UBS has not been able to break into the top 5 in global fixed income trading. Reports compiled privately for the big banks by Coalition Index show that JP Morgan Chase, Deutsche Bank and Barclays are the pre-eminent players in that market. “It’s such a capital intensive business that you need to be in the top five to make it worthwhile,” says Frank Braden, banks analyst at S&P Capital IQ in London. A UBS investor said, “There was a scale problem. With only $2.5 billion of revenues in the third quarter of 2012, UBS’s investment bank is much smaller than most of its peers who typically generate over $4 billion each quarter.” Fixed income, currencies and commodities typically account for half of UBS’s investment, but the Swiss group said it would stay in the currencies markets as well as in certain areas of fixed income closely related to its debt capital markets business, without giving full details. This retreat will allow the bank to cut risk-weighted assets in the investment by SFr 100 billion, some Sfr 60 billion more than previously announced, down to Sfr 70 billion over the next five years.