and implications of basel ii, central bank of the republic of turkey, istanbul, 16 may 2005. * * * ladies and gentlemen, i thank the organizers of this conference for inviting me to be here today. i am especially pleased to be speaking on such an important issue. the concept of financial stability, considered from different perspectives, which is the main focus of the conference, is appropriately receiving considerable attention in the light of the variety of risks confronting financial systems. my presentation will deal with the practice of financial stability assessment in greece, key aspects of the basel ii implementation process in greece, and some implications of basel ii for financial stability. it is generally agreed that the objective of financial stability assessment is to review the main sources of risks and vulnerabilities likely to affect the stability of the financial sector and to evaluate its capacity to absorb the impact of adverse disturbances. the bank of greece ’ s assessment of the stability of the greek financial sector is contained in a section devoted to that issue of its semi - annual report to the greek parliament. moreover, the bank ’ s annual report to the general meeting of its shareholders also contains a section on the stability and the supervision of the greek banking sector. before presenting the bank ’ s approach to financial stability assessment, let me provide some key aspects of the greek supervisory framework and of the greek financial sector. effectively there are three bodies responsible for supervision of the financial system as a whole. • the bank of greece regulates and supervises credit institutions and some special institutions such as credit companies, financial leasing and factoring companies, etc. it also has a mandate to contribute to the overall stability of the financial sector. • the hellenic capital market commission regulates the capital markets and supervises investment firms and collective investment funds. • finally, the recently - established commission for the supervision of private insurance is responsible for insurance companies. cooperation between the three domestic supervisory authorities is crucial to the pursuit of financial stability. to this end, a memorandum of understanding has been signed between the bank and the capital markets commission which lays down the practical arrangements for cooperation ; in addition a representative of the bank sits on the commission ’ s board. cooperation with the new supervisory body for the insurance industry is expected to be organized along similar lines once the authority is fully operational. banks dominate the greek 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

. in fact, until not long ago, the consensus in academia on monetary policy mostly overlooked the issues related to structural change and uncertainty – as reflected, for example, in lars svensson ’ s presentation at the 1999 jackson hole symposium. this literature implicitly assumed that we, central banks, were aware of the true economic model, that we were able to correctly observe all relevant variables, and that we accurately knew the nature and sources of the various random forces affecting the economic system. in this conceptual approach, the only remaining “ uncertainty ” was actually the effective value of these stochastic disturbances. in terms of the knightian distinction between risk and uncertainty, it was, at most, a risk situation where policymakers seemed to know the random distribution within the various contingencies. they also seemed able to quantify the likelihood of the several possible events occurring, ultimately assuming that the future would replicate the past. however, in most cases central banks evidently face a quite different reality : many risks are essentially not quantifiable because quite often not only the likelihood of each individual event is unknown, but also the whole range of possible contingencies. in short, uncertainty makes monetary policy implementation an extremely hard task, even in industrial economies. in emerging countries, where institutions are still in the process of consolidation, the central banker ’ s task is even harder : the instruments have a limited power and the boundaries between the scenarios which require intervention due to market failures and those that belong to the usual turbulences in a dynamic market are not so well - defined. this is especially true for countries that have had a fixed exchange rate for decades and, for several reasons such as fiscal, financial, or external dominance, have suffered from macroeconomic instability, marked by currency substitution and the dollarization of liabilities, which have hampered monetary policy implementation. uncertainty about how the economy really works and about the true value of the parameters together with data quality and timeliness ( and, consequently, the robustness of estimates ) is an essential constraint that not only affects the central bank, but also the private sector. there is huge uncertainty about the future behavior of the main domestic variables, especially in relation to ( both goods and factors ) relative price dynamics and that of the various sectors of the economy. another important restriction is given by the difficulty in identifying the nature of shocks, especially external shocks. the world continues to tread today a path of sustained expansion in a context of stability. this pattern of growth is even healthier than