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Since the development of the 1988 Accord, the breadth of banking activities has been extended into other areas such as securities and insurance.  The development of complex corporate ownership structures has also accelerated.  The 1988 Accord can no longer be relied upon as a good measurement of capital adequacy for banks.  The Accord essentially provided for just one option for measuring capital adequacy of banks.  It gives an equal risk-weight to all corporate credits whether of high or low credit quality; it fails to incorporate potential savings from loan portfolio diversification as a result of its simple additive nature; it has led to extensive regulatory capital arbitrage which adds to the riskiness of bank asset portfolios; the fact that risks facing a banking institutions are forever changing and increasing beyond those related to credit, makes the 1988 Accord (as subsequently modified) severely inadequate.

It is against this background that the new Accord which will replace the 1988 Accord has been designed to make for supervision and regulation of banks in the context of modern, global financial markets.  The objectives of the Basel Committee for initiating the new Accord are as follows:
- continue to promote safety and soundness in the financial system and thus avoid any systemic failure;
- continue to enhance competitive equality;
- constitute a more comprehensive approach to addressing risks;
- contain approaches to capital adequacy that are appropriately sensitive to the degree of risk involved in a bank’s positions and activities; and
- focus on internationally active banks, although its underlying principles should be suitable for application to banks of varying levels of complexity and sophistication.

The New Capital Accord or Basle II as it is popularly known, consists of three mutually reinforcing pillars:
Pillar 1: Minimum Capital Requirement
Pillar 2: Supervisory Review Process
Pillar 3: Market Discipline

The three pillars are a package, therefore Basel II cannot be considered fully implemented if the three pillars are not in place.  Minimum or partial implementation of one or two of the pillars will not deliver an adequate level of soundness.  However, proper implementation of Basel II must take account of the financial, accounting, legal, supervisory and market environment in which banks operate.