This article provides an introduction to the new Basel II Capital Framework (Basel II) and the Reserve Bank's approach to its implementation in New Zealand. Bank capital plays an important role in absorbing unexpected losses. Regulators have an interest in the amount of capital held by banks and set some minimum capital adequacy requirements for banks. Basel II replaces the current regulatory requirements and provides a new framework for thinking about capital's role in banking and how capital requirements should be calculated. The main objectives of Basel II are to increase the sensitivity to risk of regulatory capital requirements, and to provide incentives for banks to enhance their risk-management systems and processes. The Reserve Bank is responsible for setting regulatory capital requirements for banks incorporated in New Zealand. For locally-incorporated banks that also have operations overseas, the Reserve Bank liaises closely with the relevant foreign supervisors to ensure a smooth and efficient implementation and operation of the rules in New Zealand.