In the Basel I accord published by the Basel Committee on Banking Supervision, the Committee explains why using a risk-weight approach is the preferred methodology which banks should adopt for capital calculation:[2] Usually, different classes of assets have different risk weights associated with them.
The calculation of risk weights is dependent on whether the bank has adopted the standardized or IRB approach under the Basel II framework.
In the most basic application, government debt is allowed a 0% "risk weighting"[4] - that is, they are subtracted from total assets for purposes of calculating the CAR.
The main recommendation of this document is that banks should hold enough capital to equal at least 8% of its risk-weighted assets.
[6] The calculation of the amount of risk-weighted assets depends on which revision of the Basel Accord is being followed by the financial institution.