In July 1988, the Basle Committee on Banking Regulations and Supervisory Practices published a document proposing new rules for the regulation of bank capital. In 1991, the EC Own Funds and Solvency Directives came into law. These came into force in Ireland in January 1993. The risk adjusted value of the banks' asset portfolio is calculated and a minimum of 8% is recommended for the ratio of bank capital to the risk adjusted value of the bank's asset portfolio. The validity of risk adjusted capital adequacy rules and their application to Ireland is examined in the light of evidence from the economics of regulation and from finance theory. It is found that there is a clear interrelationship between protective regulation, in the form of deposit insurance, and prudential regulation such as risk weighted capital asset ratios. The Basle risk asset ratio is a first attempt at an internationally agreed definition of portfolio risk. Its great advantage is its simplicity. However, this simplicity may have been gained at the expense of full coverage of portfolio risk. The failure to account for asset covariances limits the effectiveness of the Basle ratio.