Notwithstanding the risks identified, market analysts are expecting that the profitability of euro area LCBGs is likely to strengthen further in the short term, underpinned by a favourable economic outlook and benign credit conditions. [see slide 12] Forward-looking market indicators for the credit risk of euro area LCBGs reflect this broadly positive assessment.
For instance, the distance-to-default indicator continued to rise, including for the weakest banks. While this may reflect the low probability assigned by market participants to the materialisation of the risks and vulnerabilities identified by our analysis, it could also signify a favourable assessment of the shock-absorbing capacity of the banking system, supported by comfortable solvency ratios and improved risk management.