In assessing the exchange rate it is important to point out that in real terms the exchange rate is not much higher at present than its average over the past ten years. Thus there is no possible way to claim that the current exchange rate is blatantly out of step with what is appropriate for the economy or is far from the real equilibrium exchange rate. It has also been claimed that there is a significant risk of deflation in Iceland. The Central Bank considers the likelihood of this to be negligible. In fact, the talk of deflation can largely be expected to reflect international discussion of the same issue, with claims from various quarters that there is a risk of deflation in Germany and the USA in the same way that has happened in Japan. Nothing suggests that deflation is looming in Iceland – wage costs have risen, growth in money supply is robust, inflation expectations in the market are around 2% or above, and one of the largest construction programmes in Icelandic history is on the horizon. It may be added that, up until now, Iceland has never had any problems in kindling inflation. In light of all the above, the Central Bank does not believe that there are grounds for a large cut in interest rates in order to bring down the exchange rate of the króna or dispel the risk of deflation, which is virtually nil anyway. Such action would probably pave the way for subsequent overheating of the economy and inflation.
Then, since these imperfections shape the responsibilities and interventions of the regulatory and oversight authorities including central banks I shall deal with the nature of oversight. Finally I shall turn to a number of contemporary challenges that regulatory and oversight authorities face in the field of securities clearing and settlement systems. 1. The provision of clearing and settlement services by the financial system and its contribution to welfare  What is the basic role of a financial system? In my context a financial system can be understood as a set of instruments, of markets and of institutions. Following Merton and Bodie (1995) the primary role of the financial system is “to facilitate the allocation and deployment of economic resources, both across borders and time, in an uncertain environment”. In other words a financial system can be understood as the dynamic response of institutions and processes to changing imperfections such as information and transaction costs. From a practical point of view a financial system is meant to provide for the allocation of economic resources to productive investment opportunities, the trading of risks, the collecting and processing of information. Prominently this also includes the provision of clearing and settlement services. Let me concentrate on the latter, i.e. on the provision of clearing and settlement services. There is no doubt that Central Securities Depositories (CSDs), International Central Securities Depositories (ICSDs) and Central Counterparties (CCPs) are among the crucial building blocks of any wellorganised financial system.