Regulatory capital is a bit like a tax on banks. Since the implementation of the 1988 Basel Capital Accord, it has served as a safety measure in the international financial markets by ensuring that banks have enough capital to bear the risks they take. But, like tax policy in most economies, the regime has been a distorting factor. Capital requirements have led banks to favour some product lines over others and to find creative - if not always socially beneficial - ways to reduce the burden.

The Bank for International Settlements' proposed update to the Accord, which is expected to be finalised this year and implemented by 2004, aims to reduce some of the market distortion, partly by refining the original Accord's treatment of banks' credit risk.