Basel I was developed in 1988 by the Basel Committee on Banking Supervision. BCBS, a group made up of central bankers and regulators from around the world in an increasingly global financial system. They believed there was a need for a consistent approach to regulation so banks could compete internationally on a level playing field. The first Basel Accord focused on credit risk in banking and quantified this through a concept referred to as risk weighted assets or RWA. Under Basel I a bank's assets, which very broadly can be thought of as its loan portfolio were classified according to how risky they were with a weight ranging from 0 to 100%. The more riskier banks' assets, the more regulatory capital based on their shareholders' equity that needed to be held. Since this capital represents the headroom for liability holders, if assets decline in value and more risky assets have a bigger chance of suffering losses. Basel I helped banks to be better organized and managed by focusing management's attention on how much regulatory capital the bank had to hold. Issuing more risky loans would mean more capital would need to be held, potentially reducing the ability of the bank to pay dividends to shareholders. However, Basel I had some weaknesses coming from the simplicity of its RWA and regulatory capital calculations to adjust for these weaknesses as they became apparent and also as banks changed their approaches to take advantage of these weaknesses. Further versions were released Basel II in 2004 and Basel III in 2010.

As initially introduced, under Basel I, banks are required by regulators to hold a minimum amount of capital. Risk weighted assets, or RWA are used to link the minimum amount of capital that banks must have. With the risk profile of the bank's lending activities and other assets, different classes of assets held by banks carried different risk weights. This example uses the initial Basel I risk weightings, where cash and government bonds essentially assets with no material credit risk have a 0 weighting. When this risk weighting of 0 is multiplied by the amount of the cash and government bond positions 40 and 100 respectively, the risk weighted assets is 0, meaning the bank does not need to hold any capital buffer for these assets. This makes sense since the risk of losing money from credit defaults on these assets is assumed to be 0, and so no capital needs to be held. Corporate bonds had a risk weighting of 100%, meaning the 200 size of the loans translates into risk weighted assets of 200. For mortgages where the property acts as collateral and therefore reduces the risk to the bank. The risk weighting was 50%, meaning that despite the mortgage portfolio amounting to 100, the risk weighted assets for mortgages is only 50. This results in total risk weighted assets of 250, despite the total assets of the bank being 440. To calculate regulatory capital ratios, regulatory capital is divided by the risk weighted assets. There are a range of different types of capital. Tier 1 capital is somewhat simply calculated as total shareholders equity minus any goodwill, which is usually worthless in a liquidation. In this example, we have 30 of shareholders equity minus 10 of goodwill giving tier one capital of 20. Total capital includes tier 2 capital as well as tier 1. Tier 2 capital can take various forms, but subordinated debt is probably the best example. With the tier 2 capital of 30, added to the tier 1 capital of 20, we have total capital of 50. The tier 1 capital ratio is therefore 20 of capital divided by the risk weighted assets of 250, giving a tier one capital ratio of 8%. For the total capital ratio, it's 50 divided by 250, giving a total capital ratio of 20%. These capital ratios are a key way of establishing the safety of different institutions. Regulators do set minimum levels, but the amount by which a bank is over the minimum is an indication of how aggressive or prudent they are being.