In June 2004, the Basel Committee released the New Basel Capital Accord (also referred to as Basel II) and required Basel II be implemented globally by the end of 2006. All internationally active banks in the major financial markets around the world will follow Basel II. The HKMA has announced that local banks will adopt the timetable given by the Basel Committee and Hong Kong is among the first to announce its implementation proposals.

Firstly, Basel II helps improve the security and stability of the banking sector. When assessing the capital requirements for credit risk, Basell II requires banks to adopt a more risk-sensitive approach, i.e. to hold more capital against high risk lending. Furthermore, banks will be required to hold capital charge against operational risk for the first time. Secondly, in addition to credit risk, market risk and operational risk, banks will also be required to make a comprehensive assessment of other types of risk to determine how much capital is needed. The banking sector is encouraged to move towards forward-looking risk management and active capital planning through enhancing the supervisory review process under Pillar II and strengthening the connection between all risks and capital level. Thirdly, Basel II requires banks to make greater disclosure under Pillar III and banks' risk management are expected to improve further through the transparency of information.

The New Capital Accord will have significant impacts on the Bank's business. The Group will strictly follow the HKMA's supervisory requirements to make all preparations so as to ensure its implementation of Basel II from the beginning of 2007.