before the end of 2006. an important issue for the bank of greece is to evaluate not only the technical aspects of the banks ’ internal systems and the methodologies used to validate their output, but also to ascertain whether the output of these systems is utilized in managerial decision - making in such areas as loan approval and pricing, provisioning, and capital allocation. at this stage it is difficult to determine the overall impact of basel ii on the total capital requirements of the greek banking sector. the impact will depend not only on the alternative approaches adopted by the banks, but also on the composition and quality of their assets, both of which are affected by economic conditions. however, one limited preliminary indication was provided by the result of the 2003 quantitative impact study. for the 6 greek banks that participated using only the standardized approach at that time, there was a 7. 5 % net increase in the combined capital requirement for credit and operating risk compared to the corresponding requirement under the existing framework ( a 2. 5 % decrease of the requirement for credit risk and a 10 % increase for operating risk ). pillar ii on supervisory review requires the conduct of risk - based supervision and the existence of detailed systems and policies at each bank to determine, maintain and allocate economic capital in accordance with its risk profile. this increases the pressure on supervisory resources as well as banks. in greece, supervision has traditionally focused more on examining the accuracy of supervisory returns submitted by the banks, on a point - in - time evaluation of the quality of loan portfolios, and on the technical calculation of capital requirements to cover credit and market risk. in recent years, however, increasing emphasis has been placed on the assessment of internal control and risk - management systems, taking into account the risk profile of each bank. in this respect, the bank of greece found it necessary to impose a minimum capital adequacy ratio above the statutory minimum of 8 % on some banks. to enhance its ability to conduct risk - based supervision, the bank has taken steps to improve the skills of existing supervisory staff through specialized training and has also recruited personnel with skills in quantitative risk analysis. the banks have also strengthened their risk management units, but, in order to successfully implement pillar ii further efforts will be required. pillar iii enhances market discipline by requiring credit institutions to disclose appropriate risk information, allowing the market to reward well - managed and well - capitalized credit institutions. let me now turn to some implications of basel ii for the stability of the banking

it was argued that capital requirements applicable to loans to these firms, especially under the irb approach, would increase compared to the existing framework, leading to an increase in their financing costs or, possibly, to a decrease in the amount of credit supplied to them. both these factors would adversely affect their financial condition. this, in turn, would have negative consequences for economic growth and employment and would impact on financial stability, particularly in countries such as greece, where smes account for a large share of total output and employment. i believe, however, that the final version of basel ii substantially alleviates these concerns. in greece, the majority of banks will adopt the standardized approach. for the significant part of their total exposures to smes, which will qualify as retail exposures, the applicable risk weight will actually decrease compared to the existing framework. for most of the remainder, the risk weight will remain unchanged. even in the case of banks adopting the irb approach, most of their sme customers are expected to derive some benefit either from the firm - size adjustment for corporate exposures or from the generally lower risk - weight function for retail exposures. increased disclosure under pillar iii is expected to strengthen market discipline by increasing transparency. this will have a positive effect on stability to the extent that anticipated market reaction dampens banks ’ incentives to assume excessive risks. however, the influence on bank behavior of the direct market discipline exercised by depositors, other creditors, and shareholders, is often limited either because these stakeholders lack sufficiently strong incentives or because, in some cases, the interests of the different stakeholders do not coincide. in particular, the actual or presumed existence of public safety nets may dampen the incentives of depositors to exercise discipline. wider and more pertinent public disclosure is expected to enhance the information content of listed banks ’ share prices and of interest spreads on subordinated bank debt. this will increase the accuracy and predictive power of fragility indicators based on market data, such as the distance to default, an indicator derived from market prices of bank shares. at this point, i may mention that the 10 banks whose shares are listed in the athens stock exchange account for over 75 % of the total assets of all credit institutions operating in greece. based on empirical evidence, changes in the distance to default represent a useful forward - looking indicator for stability assessment purposes, especially if based on weighted average values for the entire banking sector rather than for each individual bank. in general, marketbased fra