It is important to make the distinction between the two different types of capital. The capital on a bank's balance sheet usually called equity, is accounting capital and it's the difference between the market value of the bank's assets and the market value of the bank's liabilities. It's calculated using international accounting standards and expressed in monetary terms. Regulatory capital refers to the amount of capital that a bank needs to have in order to continue as a going concern should future losses be higher than expected. Regulatory capital is determined by risk weighted assets or RWA and minimum requirements are expressed as a percentage of risk weighted assets.

RWA is positively correlated to the value of the assets on the balance sheet and the riskiness of the assets. A bank with a large balance sheet of risky assets will have a high RWA. The bank will need to hold a relatively higher amount of regulatory capital. Regulators also govern what can be used as regulatory capital, what can't be used as regulatory capital, and in the instance of qualifying capital, different levels of quality. By dividing qualifying regulatory capital by the RWA, the bank's capital ratios can be calculated. There are two approaches to calculating RWA. Under the standardized approach national regulators assign different types of assets, different weights. The riskier the asset, the higher the weight, and the more regulatory capital the bank is required to hold. This slide shows a selection of current weights as determined by the Basel Committee on Banking Supervision and published under the Basel Accords. The Basel Accords is a globally recognized regulatory framework national regulators typically use to regulate banks in their jurisdiction. Under Basel III, the latest framework, the government debt of highly rated countries such as the US have a weighting of 0%, meaning that no regulatory capital is required to be held if a bank holds those bonds as assets on its balance sheet. However, a weight of 150% is applied to the value of corporate bonds with a credit rating below B-.