The current crisis has also shown that national regulation of rating agencies is insufficient, and concerted international cooperation is required to tackle the problem of international regulation of credit rating activities. It makes sense for the International Organizations of Securities Commissions (IOSCO), Bank for International Settlements (BIS) and Financial Stability Forum (FSF) to coordinate in setting standards and in enforcing them. An entity should be designated to take regular responsibilities in implementing the rules. The focus should aim to identify problems in the rating industry, to identify the conflicts of interest between the raters and the issuers and to improve the independence, fairness and transparency of rating activities. Such a body should review the track record of the major rating agencies on a periodic basis and assess the default and loss statistics of different ratings. In particular, reviews should also be made in the area of sovereign ratings of emerging economies. Results of such regular reviews should be made public so that market participants can form their own opinions and make better use of the credit ratings. In cases severe problems are identified, the designated implementing entity should take remedial actions including, among others, imposing corrective actions on the problem agencies, publicizing problem areas, private censures and public reprimands. Based on the findings of the entity, national regulators can also impose punitive measures including banning from the industry on the problem agencies.

(5)Promote higher corporate governance standards

Evidence abounds that boards of directors at some systemically important financial firms in the US were rendered as a "gentlemen's club", which rubber-stamp all major decisions sponsored by the management. Often times, the independent non-executive directors (INEDs) did not have meaningful expertise or training in financial services sector. As a result, the board is unable to provide strategic direction for the firm's operations and effective guidance and backing for risk management and internal control. Cases also reveal that at some too-big-to-fail institutions, the risk management professionals were beholden to business people. This has led to lack of effective check and balance mechanism, which tolerated excessive risk-taking in pursuit of short-term rewards.

Management was motivated by short-term barometers such as quarterly results and year-end bonus. The pro-cyclical compensation structure, which rewards short-term results, doesn't help in restraining aggressive risk-taking. In addition, decisions for succession planning and appointment of Chairman/CEO was sometimes made not on candidates' well-rounded qualifications and merits but on factors not consistent with the interests of the shareholders and the firm's long-term viability.

Regulators should impose higher governance standards on systemically important and internationally active financial institutions. At the minimum, the majority of their INEDs should be financially literate and can provide the management with substantive guidance in areas of the firm's strategic positioning in the market place, balance between business expansion and quality of growth, financial innovations, succession planning and etc. The annual report of such firms should disclose how active the INEDs are with respect to the firm's issues in and out of the boardrooms, so that investors can judge the effectiveness of the board in discharging its fiduciary duties. In some countries, it may also help to abolish the practice of the same person holding both positions of chairman and CEO, especially in those financial institutions of systemic importance.

(The People's Bank of China, March 27, 2009)