New analysis finds that while current reforms are moving in the right direction, many difficult decisions lie ahead. It identifies five key priorities in the reform agenda: 1) A level playing field in regulation; 2) Improve the effectiveness of supervision; 3) Develop coherent resolution mechanisms at the national level and for cross-border financial institutions; 4) Establish a comprehensive macro prudential framework that will require indentifying, monitoring, and addressing systemic risks generated by individual firms and collective behavior; and 5) Reforms must address emerging exposures and risks in the entire financial system, not just banks.

Credit ratings have inadvertently contributed to financial instability. This paper recommends that ratings of governments or companies should be seen as one of several tools to measure risk, and not as the sole and dominant one. Over-reliance leading particularly to abrupt downgrades, can lead to deleterious selloffs of securities with the potential for broader spillovers, triggering further sell-offs. Actions by ratings agencies to make changes in ratings less abrupt have been counter-productive: much market reaction occurs when warnings are released rather than when the actual rating changes. And sovereign ratings could have taken better account of debt composition and contingent liabilities. Investors must also be weaned off credit ratings too, and perform their own risk assessments according to their size, sophistication, and the instruments being rated. The main ratings agencies should be subjected to increased oversight