financial sector, accounting in terms of assets for approximately 85 % of the entire financial sector. the banking sector itself is characterized by relatively high concentration with the 5 largest banks controlling 65 % of the total assets of the banking sector. the bank of greece ’ s regulatory framework is essentially based on the relevant eu directives which are closely aligned to the basel i framework. in the greek context, credit risk is the main component of banking risks. overall the profitability and capital adequacy of greek banking groups is satisfactory. on a consolidated basis, the rate of return on equity and the rate of return on assets before taxes were respectively 16, 1 % and 1 % for 2004 and the capital adequacy ratio reached 12, 8 % at the end of 2004. in view of the dominance of the banking sector in the greek financial system, i will focus on this sector. first, let me outline the approach followed by the bank to assess the stability of the greek banking sector. on the one hand, this approach involves an evaluation of the information provided by a number of indicators relating to the risk profile of banks and the economic condition of households and firms, and an assessment from a stability perspective, of developments in key macroeconomic variables and markets. on the other hand, the bank seeks to determine the banking sector ’ s capacity to absorb negative shocks. for this purpose, it utilizes data on bank profitability and capital adequacy and also takes account of the results obtained from stress tests. to derive the main indicators, the bank makes use of information submitted by banks in their supervisory reports on exposures in default, provisions, concentration ratios and credit migrations of individual exposures. alongside ratios calculated from this source, data from household and firm surveys on both debt and income / profit levels provide information on the debt - bearing capacity of the household and business sectors. data from supervisory returns also provide information on market and liquidity risks. in its evaluation of the information provided by all these indicators, the bank takes into account the corresponding eu and eurozone average values of these indicators where available. as regards macroeconomic variables and markets that may affect the stability of the banking sector, the bank focuses on developments in the gdp growth rate, interest rates and exchange rates, and in the stock and real - estate markets. the direct impact on the financial condition of the banking sector of adverse developments in interest rates and exchange rates and in share and real - estate prices can be quantified using data on bank

exposures to each of these risk factors. the indirect impact on banks of adverse developments in gdp growth and the aforementioned risk factors on banks mainly consists of an increase in credit risk arising from the effect of such developments on the financial condition of households and enterprises and thus on their debt - servicing ability. at present, the bank makes only a broad qualitative assessment of this indirect impact in its published stability analysis. in order to assess the banking sector ’ s capacity to absorb the impact of adverse disturbances, the bank focuses on a number of developments in banks ’ financial condition and makes use of stress testing. the latter involves the bank asking banks to quantify the impact on their own funds and capital adequacy ratios of pre - specified adverse changes in the values of certain basic risk factors. the risk factors considered are the probability of default and the loss given default, interest rates, share prices and exchange rates. in addition, the bank is working towards developing a macro stress - testing framework, especially for credit risk. let me now move on to discuss issues related to basel ii, which represents a major change in the supervisory framework and a challenge to both supervisors and banks. before considering some implications of basel ii for the stability of the banking sector, i would like to refer to the preparations for basel ii implementation in greece and to the choices greek banks are expected to make between the alternative approaches for calculating capital requirements. a large majority of greek banks are expected to adopt the standardized approach in determining capital requirements for credit risk. however, a number of banks, comprising a share of around 50 % of the total assets of the banking sector, are reasonably expected to adopt the foundation irb approach for a significant part of their total portfolio. the bank of greece is encouraging banks to move to the irb approach because this approach will require an improvement in their risk measurement and management systems. thus, it will strengthen their competitive position and their capacity to successfully adapt to changes in the economic environment. for operational risk, although the majority of greek banks are expected to adopt the basic indicator approach to determine capital requirements, most of the large banks plan to adopt the more refined standardized approach. the bank of greece is working closely with the banks to help them prepare for the implementation of the new rules. in this connection, it has already put out 5 consultation documents dealing with issues where there is national discretion. these documents discuss measures which the bank intends to adopt as well as other matters requiring clarification and supervisory guidance. detailed consultation