for example dealing with the matter of repo transactions, and examining the structure of supervision of the financial markets. the committee formed by the securities authority also put forward recommendations regarding securitization, and it important that these be advanced too. and there are many other subjects. among the required changes, however, it is also important to draw attention to the arrangement of the necessary legal infrastructure. at present we are in the throes of a very long legislative process that is not yet over in relation to a law to deal with repotype financial transactions and the issue of netting. but there are several other laws that it will be necessary to advance, for instance a law that will relate to mortgage and loan securitization in general, and a law relating to the reform of the payment and settlement systems that the bank of israel is leading ( the rtgs system ). the government should certainly give maximum impetus to the promotion of the legislation in these areas. such legislation is one of the most important means for removing barriers to the development of the capital market as it sets the ground rules for the market, rules of transparency, and grants supervisory and enforcement authority to the relevant bodies. with regard to the development of and competition in the financial markets, i would like to say a few words about competition in banking. the reform of the capital market introduces greater competition into the financial systems, especially in the credit market, but competition between the banks on the retail side leaves much to be desired. this is mainly due to the fact that the largest two banks are very dominant in the banking system. their share in the system should be reduced, either by the merger of other banks or by the entry of foreign banks into retail banking in israel. such steps are the outcome of decisions by the banks themselves, but we on our side will continue to examine steps to remove barriers where they exist in this area and in the area of increased interbank competition. boosting competition in the banking system is one of the most important objectives of the bank of israel and, i assume, of the government. c. social policy as far as social policy is concerned, i do not wish to refer here to the short - term measures required. i have referred to them at length on various other occasions, and today dr karnit flug, director of the bank of israel's research department has spoken about them. i would only say that the steps decided upon in the discussion with the prime minister last december are important and the

, medium of exchange, and store of value. 3 for instance, it is common that the domestic money be used as legal tender, but that some foreign currency be used as unit of account in some transactions, and as a store of value – either directly, or via various indexation arrangements. in some countries, two or more currencies may circulate and serve as medium of exchange for different transactions – the domestic currency for smaller transactions, and a foreign currency for large transactions, for instance for real estate. the term " dollarization " generally refers to the assets and liabilities in use within an economy, and not to those either borrowed from or held abroad, although the impact of exchange rate changes on the domestic economy may be quite similar in the two cases. the emphasis in imf programs on the primary surplus of the budget – that is, the non - interest surplus – to some extent deflected attention from the depth of turkey's fiscal problem at that time. in this section i draw on the papers presented in the book edited by adriano armas, alain ize, and eduardo levy yeyati, financial dollarization : the policy agenda, international monetary fund, 2006. typically partial dollarization is the result of a period of economic instability in the past, generally a period of high inflation. in such circumstances, economic agents will want to hold safer assets 4, and the economic and political systems will produce them. that can be done by allowing the banking system to offer foreign currency, or exchange - rate - linked, accounts ; and the banking system in turn will want to lend in a similar form. dollarization typically has a long life, generally surviving long after the period of instability that gave rise to the phenomenon. it is useful to distinguish four types of dollarization : ( i ) asset dollarization ; ( ii ) liability dollarization ; ( iii ) medium of exchange dollarization in which a foreign currency is used for some transactions ; and ( iv ) unit of account dollarization, in which future payments are indexed to an exchange rate. the last is sometimes called " real " dollarization. asset and liability dollarization the key questions that arise are whether different types of partial dollarization contribute to financial vulnerability and instability, whether and under what circumstances it would be desirable to have less dollarization, and if so, how that can be achieved. we start with asset and liability dollarization. consider first the impacts on the banking system of operating in two curre