based.2 Under the Basel requirements all cash and off-balance sheet instruments in a banks portfolio are assigned a risk weighting, based on their perceived credit risk, that determines the minimum level of capital that must be set against them. A banks capital is, in its simplest form, the difference between assets and liabilities on its balance sheet, and is the property of the banks own- ers. It may be used to meet any operating losses incurred by the bank, and if such losses exceeded the amount of available capital then the bank     1In the United States banking supervision is conducted by the Federal Reserve; it is common for the central bank to be a countrys domestic banking regulator. In the United Kingdom banking regulation is now the responsibility of the Financial Servic- es Authority, which took over responsibility for this area from the Bank of England in 1998. 2Bank for International Settlements, Basel Committee on Banking Regulations and Supervisory Practice, International Convergence of Capital Measurement and Capi- tal Standards, July 1988.     would have difficulty in repaying liabilities, which may lead to bank- ruptcy. However for regulatory purposes capital is defined differently; again in its simplest form regulatory capital is comprised of those ele- ments in a banks balance sheet that are eligible for inclusion in the calcu- lation of capital ratios. The ratio required by a regulator will be that level deemed sufficient to protect the banks depositors. Regulatory capital includes equity, preference shares, and subordinated debt, as well as the general reserves. The common element of these items is that they are all loss-absorbing, whether this is on an ongoing basis or in the event of liq- uidation. This is crucial to regulators, who are concerned that depositors and senior creditors are repaid in full in the event of bankruptcy. The Basel rules on regulatory capital originated in the 1980s, when there were widespread concerns that a number of large banks with cross- border business were operating with insufficient capital. The regulatory authorities of the G-10 group of countries established the Basel Commit- tee on Banking Supervision. The Basel Committee on Banking Supervi- sions 1988 paper, International Convergence of Capital Measurement and Capital Standards, set proposals that were adopted by regulators around the world as the Basel rules. The Basel Accord was a methodology for calculating risk, weighting assets according to the type of borrower and its domicile. The Basel ratio3set a minimum capital requirement of 8% of risk-weighted assets. The Basel rules came into effect in 1992. The BIS is currently inviting comment on proposals for a new system of capital adequacy to replace the current rules. The deadline for comment on its proposals is June 2002, with the BIS hoping to implement the agreed upon requirements