Perhaps counterintuitively, we believe reversing the measures is positive for the sector as it helps dissipate any uncertainty around the path to post-Covid normalisation. The withdrawal has been well communicated and orderly. There is no abrupt end to support and we deem the sequencing of the withdrawal of measures to be appropriate.

With moratorium programmes now largely expired, visibility around balance-sheet quality is adequate, and the lifting of measures will reduce uncertainties around capital buffers and planning. As this has been done well in advance of TLTRO expirations, banks will have time to adjust before they need to step up wholesale market issuance activity.

The ECB announcement came as no surprise. Economies have recovered quickly and the outlook for 2022 remains supportive, albeit with some uncertainty around the inflation outlook and monetary tightening. As long as it happens in a controlled manner, tightening is welcome as it may boost bank revenues and profits.

The ECB communication comes at a time when most banks are posting strong full year results and announcing greater distributions of excess capital to shareholders (which were all pre-emptively discussed with the supervisor). The return to a pre-crisis prudential regime will not dent investor confidence in the sector.

According to the 10 February announcement, the ECB will not extend capital and relief measures, including exclusion of central bank exposures from the denominator of leverage ratio; and the ability for banks to operate below their Pillar 2 Guidance (P2G)

The change to the calculation of the leverage ratio – introduced in September 2020 as banks were drawing extensively from TLTRO 3 financing lines – will take effect from Q2 2022. As the TLTRO bonus rate ends in June, ending the exemption on the leverage ratio calculation creates incentives for banks to pay back excess liquidity early, especially banks whose recourse to TLTRO 3 lines was opportunistic.

We expect very little disruption, if any. Large European banks retain appropriate buffers to their leverage ratio requirements and a tightening of funding conditions is not a cause for concern, given fast deposit accumulation and Liquidity Coverage Ratios well above requirements.

Flexibility around Pillar 2 Guidance will end on 1 January 2023, after which banks are expected to operate above their P2G floors again. Transparency on P2G is poor. Few banks disclose their P2G, making it hard for investors to rely on it as an early warning signal. Logically, failing to comply with it has also less serious consequences for investors. For example, it does not automatically trigger restrictions on dividends or coupon distributions. In any case, the ECB has indicated that only a handful of banks have made use of this flexibility.

Almost in parallel with the announcement about the withdrawal of support measures, the ECB also announced the results of the 2021 Supervisory Review and Evaluation Process (SREP), as well as Pillar 2 requirements applicable in 2022 for banks under its supervision. On average, P2R has increased only marginally, reflecting broadly stable SREP scores, also backing the view that banks can stand on their own.