Such a model based on the Lamfalussy standards (1990) has already been put in place among central bankers and has proven to be effective in the context of the Continuous Linked Settlement system (CLS). A second challenge that the authorities face lies in the risk of cross-border financial transactions. Indeed, whereas the nature of the risks remains basically the same, both the probability of occurrence of an adverse event and the risk exposures themselves have clearly increased. The added dimension of cross-border activities lies in potential spillover effects due to the interlinking of systems. Credit, liquidity and operational risk events occurring in one jurisdiction may indeed trigger a systemic crisis by spilling over to foreign financial markets. Not only systems of the same nature, i.e. payment systems, but also different systems such as payment, clearing and settlement systems have been linked at an international level. A promising outcome would be a cross-border delivery-versus-payment mechanism that relies on central bank money. All in all, the current and, if feasible, future linkages explain why regulatory and oversight authorities have to widen the focus of their responsibilities further. A third challenge relates to in-house clearing, payment and settlement mechanisms at large custodians. This commercial function has undergone a remarkable process of concentration in the last few years. Some of these service providers have become very significant for the stability of the financial system as witnessed by the events of September 11, 2001.

The protection of existing or the creation of additional market failures, although inefficient on the whole, can be a profitable activity for an individual or for a single group of participants in a financial system. Therefore market imperfections once identified and addressed with appropriate measures are likely to permanently change their form and place and to challenge even the best of existing institutional arrangements time and again. A third imperfection that may affect a financial system is an unsatisfactory level of competition. When saying this I do not refer to perfect competition as described in textbooks but rather have in mind market contestability. Contestability excludes undue pricing power by market participants, the existence of collusion among market participants and barriers to entry. You will certainly agree with me when I say that there is no guaranty or a kind of “natural law” that leads markets to organise themselves according to the requirements of contestability. The free play of market forces is the exception rather than the rule. Economic agents individually benefit from rule bending. In addition, and this is of particular relevance in clearing and settlement, the presence of high fixed costs constitute relevant barriers to entry. From experience we know that these barriers reduce competition or eliminate it all together. In extreme cases we speak of a “natural monopoly” which call for regulation by public authorities. Market imperfections such as asymmetric information, negative externalities or limited competition have shaped the evolution of financial systems everywhere.