Under such circumstances, one should resort mainly to fiscal policy. A tighter fiscal policy accommodates lower interest rates, in addition to limit exchange rate pressures and moderating the boom. In a closed economy, an increase in interest rates could stop the credit expansion and avert collateral effects. However, in a small open economy subject to strong capital inflows, raising the interest rate in an attempt to stop the credit expansion may end up encouraging further capital inflows and currency appreciation, without obvious effects on the volume of credit. On the other hand, if the exuberance that induced capital inflows is due to local credit effervescence, it becomes necessary to adopt macro-prudential measures to limit risk taking. Actually, an important area of interest in the design of post-crisis policies has been the creation of buffers and other mechanisms to limit the procyclicality of financial systems. Foreign exchange intervention On top of the aforementioned argument, specific measures to confront stress episodes in international financial markets and processes of massive capital inflows cannot be ruled out, if we observe that there is no additional room on the fiscal or monetary side or that the macro-prudential instruments are not enough. In exceptional situations, it is possible to resort to foreign exchange interventions to stabilize potential fluctuations in exchange rates and lending conditions caused by massive capital BIS Review 72/2010  3  inflows. However, it should be emphasized that in the context of a floating exchange rate regime, such intervention must be used only in exceptional cases.

Across various sectors, disruptive technologies are rapidly expanding the horizon of economic opportunities while challenging existing business models. In the case of banking for instance, we have already seen greater competition from new entrants amid the emergence of fintech. Rapid urbanisation, which is more pronounced in emerging markets, and demographic changes such as an ageing population are other key trends which have major implications on economic and socio-political conditions. At the same time, there is a growing appreciation for the far-reaching impact of climate change, giving rise to calls for more sustainable growth models and innovation. All these developments that are taking place in the banking industry today have created an environment much different from the one prior to the crisis. And together with the implementation of the post-crisis global regulatory reforms, which remains a key priority, their implications require careful and deep thinking as banks plan for the future. Domestic policy continuity and priorities Our banking industry is facing the current rapidly changing and challenging economic environment from a position of strength, following the successful reform measures that were implemented. Given the high degree of openness of the Malaysian economy and the increased integration with the international financial system, external developments have continuously affected our domestic economy. But the economy has been able to weather these challenges and have remained on a steady growth path of 4 to 6% over the past five years. In recent quarters, economic growth, however, has moderated.