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."

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