claims on own country or guaranteed by Zone A banking insti- tutions Senior claims on Zone B banking institutions with an original maturity of under one year 50% Claims secured on residential prop- erty Mortgage-backed securities 100% All other claims   Zone A countries are members of the OECD and countries that have con- cluded special lending arrangements with the IMF. Zone B consists of all other countries. Under certain regulatory regimes, holdings of other Zone A govern- ment bonds are given 10% or 20% weightings, and Zone B government bonds must be funded in that coun- trys currency to qualify for 0% weighting, otherwise 100% weight- ing applies. Under certain regulatory regimes, claims on Zone B banking institu- tions with residual maturity of less than one year also qualify for 20% weighting.   Source: BIS     Exhibit 14.2 summarizes the elements that comprise the different types of capital that make up regulatory capital as set out in the EUs Capital Adequacy Directive. Tier 1 capital supplementary capital is usu- ally issued in the form of non-cumulative preference shares, known in the U.S. as preferred stock. Banks generally build Tier 1 reserves as a means of boosting capital ratios, as well as to support a reduced pure equity ratio. Tier 1 capital now includes certain securities that have sim- ilar characteristics to debt, as they are structured to allow interest pay- ments to be made on a pre-tax basis rather than after tax basis; this means they behave like preference shares or equity, and improves the financial efficiency of the banks regulatory capital. Such securities along with those classified as Upper Tier 2 capital, contain interest deferral clauses so that they may be classified similar to preference shares or equity.       ACTION IN THE EVENT OF FAILURE   The existence of a regulatory capital system is designed to protect the financial system, and therefore by definition the free market economy, by attempting to ensure that credit institutions carry adequate reserves to allow for counterparty risk. However domestic regulators are also faced with a dilemma should a banking institution find itself in an insol- vency situation, namely, to what extent should the bank be "rescued" by the authorities. If the bank is sufficiently large, its failure could have a significant negative impact on the national and global economy, as other banks, businesses and ultimately individuals also suffered losses. The large "money center" banks5are obvious examples of the type of