arises from basel ii implementation taken in combination with other recent developments, such as the adoption of international accounting standards. the first point i should make is that the timing of these various initiatives is not completely under our control : the accounting profession, for example, has tended to plough its own furrow independently of any of the banking regulators. this has been the case in many leading international financial centres, not just in hong kong. efforts are now underway in a variety of contexts to try to secure better coordination in these various initiatives, but it has to be admitted that in an ideal world they would not be quite so clustered together. that said, i would be the first to acknowledge that basel ii requires heavy investment in risk management systems and it infrastructure, as well as radical changes in the risk management culture at some banks. however, this is a healthy development. i suspect that banks would have in any case needed to make most of the so - called " basel ii - related " investment if they wanted to stay at the top of their game. by agreeing to accept banks'internal risk management systems as the basis for the calculation of regulatory capital requirements, the basel committee has provided a powerful incentive for banks to upgrade their risk management systems. but this is only what they otherwise would have needed to do to be able to compete with the best. there are, however, some quite specific challenges for asian banks in using the more advanced approaches under basel ii. one of the most important is the availability of data. historically, many asian banks have not collected the data needed to develop the type of models needed for irb purposes. some are only now starting to do so, and it will be several years before they have sufficiently rich data that it can begin to inform their credit risk management processes. a second, related, factor is that even where the data has been collected, in many countries the default experience is distorted by the 1997 - 98 financial crisis : the question for banks is to what extent this experience should be factored into their risk management systems. a third issue is the extent to which off - the - shelf models that have been developed primarily for the us market can capture the behavioural characteristics of asian borrowers. none of these problems are in principle insurmountable. however, they do suggest that a degree of caution is in order before banks make the leap to irb. that is why we have been advising those banks that are considering using irb approaches to " look before you leap. "

basel ii goes much further than this in looking at risk. as you will i am sure know, as risk management professionals, these three risks are only scraping the surface. banks'risk management functions need to look at a much wider range of risks than this - interest rate risk in the banking book, foreign exchange risk, liquidity risk, business cycle risk, reputation risk, strategic risk. the risk management role of helping identify, evaluate, monitor, manage and control or mitigate these risks has become a crucial role in modern - day banking. indeed, it is probably not exaggerating the importance of this to say that the quality of a bank's risk management has become one of the key determinants of a success of a bank. basel ii recognises the importance of these risks - and of the quality of risk management - by means of what is known as " pillar 2 ". under pillar 2, there is an assessment firstly of all the risks a bank is running and, secondly, of its ability to manage these risks. this can lead to the bank being required to hold more capital to cover these risks, or to make improvements in its risk management. pillar 2 therefore encourages banks to improve risk management, and gives capital incentives to do so. 1 / 5 i will say some more about this later on, but it is probably time at this point that i said a little about how hong kong is implementing basel ii. hong kong implementation we took a strategic decision early on in the basel ii process that hong kong should implement basel ii in accordance with the timetable recommended by the basel committee of banking supervision for its own members. this means adoption of most of the approaches under the new framework from the start of 2007, and the more advanced approaches from the start of 2008. thus hong kong will adopt basel ii at the same time as other major international financial centres, such as london, frankfurt and tokyo. from a regional perspective, the implementation timetable in hong kong is broadly similar to that being adopted by australia and singapore. for several years now the hkma has been developing its supervisory approach along basel ii lines, and this is leading to some significant changes in how supervision is conducted. central to this is the issue of " process versus rules ". process versus rules the original basel capital accord was developed when risk management was still very much in its infancy. it reflects what might be called a " rules - based " approach to regulation in the sense that it sets prescriptive standards that banks are