a formidable task. partly it is of public good nature. consequently, while clearing and settlement institutions may effectively reduce market failure and thereby create value for the economy as a whole, more narrow - minded but nevertheless rational market participants might on the contrary pursue more limited goals. 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. financial market institutions were created partly in reaction to these imperfections and continuously adapt themselves when faced with fresh challenges. additional support comes from the public regulatory and oversight regimes, especially in the field of securities clearing and settlement systems. 3. the definition of oversight at this stage i switch perspectives and i would like to briefly explain what central bankers, including myself, have in mind when referring to an effective oversight regime. broadly speaking oversight can be defined as a central bank ’ s contribution to the smooth functioning of payment, clearing and settlement systems. oversight differs from supervision, which aims at monitoring the soundness of financial institutions at the micro level. it also differs from surveillance, which focuses on a smooth functioning of financial markets. furthermore there is a wide consensus, at least among central banks, on what the

##gned finances were viewed as having a credible chance of being remedied. the monetary authority is also part of the fiscal picture. failed public finance dynamics can show up in unchecked borrowing from the central bank and in growing gaps between local currency liabilities of the monetary authority and foreign reserves, which are held to support the currency. central bank lending to the government can also be a source of accumulated bank liquidity, of the sort that might seek to flee the jurisdiction, if they are allowed to become mobile. the confidence boost that a financial system would need, before opening itself unchecked to short - term financial flows would be, in a case where deficits and debts are a concern, to quiet such concerns. deficits or debt burden need not disappear at the outset, but there has to be an anchored belief that such reduction would occur within a comfortable time frame. at the central bank, we are focused on gradually reducing the amount of outstanding credit provided to the government. it will also achieve, as a side benefit, some important reduction in surplus liquidity within the banking system. over the medium - term it is also expected that a new central bank act would put stronger governance arrangements in place to continue to reduce lending to government. at the same time the public finances will have to support some of the liquidity reduction in the medium - term through direct slowdown and eventual reduction in the debt burden. 7 aside from exchange control, liberalisation also has to be considered in the context of the national investment policy. if certain sectors are constrained from foreign participation, then bahamians operating in those sectors would also be constrained in how they a costly option that many countries have taken is to have the central bank issue its own securities to soak up liquidity. however, if done aggressively the institution could incur losses. 7 | page collateralise access to foreign currency financing. if majority ownership in a venture must be bahamian, then the majority financing source, unless it is domestic would not be permissible in foreign currency. 8 also, to the extent that restrictions apply to how nonresidents acquire real estate in the bahamas, use of such assets as security for mortgages would be subject to a layer of processing and approval that is independent of any ec rules. figure 2 : central bank financing to government as the government debt burden increased, reliance on central bank financing, especially over the last decade, has also increased …. the balance sheet impact for the central bank has been that the