French regulating body Commissaire Baincare is requiring French banks to adopt new risk weighting guidelines for ABS tranches. The new criteria is expected to take hold immediately and, in some cases, the new approach seems drastic, sources said, and was likely prompted by the growing volatility seen in subordinated CDO tranches.

"It appears to be in the CDO market in particular where French banks could be most exposed," reported Dresdner Kleinwort Wasserstein. "If we look at the volume and number of negative rating actions in the European CDO market alone, nine tranches have suffered downgrades from an original triple-B rating to triple-C or below, and eight single-A rated tranches are now at double-B or below."

Dresdner added that a number of these deals benefited from a ratings arbitrage and have consequently suffered severely in the recent economic environment.

The new rules require a 100% risk weighting for all triple-A tranches. In contrast, under the previous guidelines, the triple-A RMBS tranches were only required a weighting of 50%. But the current amendment does suggest that in future deals this change may be negotiable. "Future transactions where the principle of transparency can be applied may still come under the old rules," explained Dresdner. "In particular transparent Fonds Commune de Creances (FCC)."

Dresdner added that it did not expect any major consequences would result for triple-A rated investments as a result of the new bulletin.

Double-A-plus to single-A tranches will maintain 100% risk weighting. The mezzanine tranches, which are rated triple-B to double-B-minus, will have to be deducted from capital. In the old approach, these deals were 100% risk weighted.

"The commission seems to be taking a much more conservative approach compared to other regulators," said Dresdner in its report. As an example, the bank listed the new U.S. FDIC rules, which require triple-B and double-B tranches to be 100% and 200% weighted respectively. Basel 2, on the other hand, requires that they be 100% and 150% weighted, with a deduction only for tranches below double-B-minus.

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