4. In establishing appropriate capital charges for specific risk the Committee has sought to classify debt securities into a number of broad categories of issuer in a manner similar to that used by both banking and securities regulators in their present capital regimes. It is proposed that the specific risk would be graduated in five broad categories as follows:

5. The category "government" would include all forms of government ^ll paper including bonds, Treasury bills and other short-term instruments, but national authorities would reserve the right to apply a specific risk weight to securities issued by certain foreign governments, especially to securities denominated in a currency other than that of the issuing government.

6. "QualifYing" would apply to issues which meet the criteria set out in the following paragraph. ^l2 Three different weights are proposed depending on the residual maturity of the issue in question. This is because the uncertainty about creditworthiness increases with the life of the security, as reflected in the fact that spreads between corporate and government securities tend to widen along the maturity spectrum.

7. Qualifying items would include securities issued by public sector entities and multilateral development banks, plus other securities that are:

• rated investment-grade ¹³ by at least two credit rating agencies specified by the relevant supervisor; or

• rated investment-grade by one rating agency and not less than investment-grade by any other rating agency specified by the supervisor (subject to supervisory oversight); or

• unrated, but deemed to be of comparable investment quality by the bank or securities firm, and the issuer has securities listed on a recognised stock exchange (subject to supervisory approval).

The supervisors would be responsible for monitoring the application of these qualifying criteria, particularly in relation to the last criterion where the initial classification is essentially left to the reporting institutions.

8. National authorities would also have discretion to include within the qualifying category debt securities issued by banks in countries which are implementing the Basle Accord, subject to the express understanding that supervisors in such countries would undertake prompt remedial action if a bank fails to meet the capital standards set forth in the Accord. Similarly, national authorities would have discretion to include within the qualifying category debt securities issued by securities firms that are subject to equivalent rules.

9. The "other" category would receive the same specific risk charge as a private-sector borrower under the Basle Accord, i.e. 8%. No maturity breakdown is proposed within this category of specific risk.

10. Consideration has been given to the possibility of determining a specific risk charge higher than 8% for high-yield debt securities, which often have equity-like characteristics. Such securities are commonly traded in only a few markets and their characteristics would not be easy to define, so no standard treatment is proposed. However, it is proposed that either:

• a specific risk charge higher than 8% would be applied to such securities (the precise charge and the criteria being at national discretion); and/or

• offsetting for the purposes of defining the extent of general market risk (see paragraph 18 below) would not be allowed between such securities and any other debt securities.

11. Convertible bonds, i.e. debt issues or preference shares that are convertible, at a stated price, into common shares of the issuer, would be treated as debt securities if they trade like debt securities and as equities if they trade like equities.

Footnotes:

11. Including, at national discretion, local and regional governments subject to a zero credit risk weight in the Basle Accord.

12. One country has expressed a general reserve on the definition of the qualifying category.

13. e.g. rate Baa or higher by Moodys and BBB or higher by Standard and Poors.