In addition, drastic reductions of positions in domestic markets by non residents may also introduce excess volatility in the exchange rate markets as investors leave the country. Through these chains of effects, a reversal or even a slowdown in capital inflows may significantly weaken financial stability in the local economy and also potentially in the economies from which the inflows are being financed. A second source of vulnerabilities may arise from cross border flows that provide debt funding to local agents. These can be financial intermediaries or non-financial companies, and the funding can be via deposits or lending. If lending is short term, then this may result in maturity mismatches. If lending is in a foreign currency, then the risk of currency mismatches must also be factored in. The problem arises if local agents do not correctly internalize these risks or if regulation limiting these risks in the financial sector is inadequate. A third source of problems is that capital flows may increase the scale and the complexity of the local financial system, and this expansion may expose weaknesses in the regulatory and supervisory structure. For example, if external funding has not been readily available in the past for certain intermediaries, awareness of currency mismatches can be weak for these institutions or for their customers, and may not be properly addressed in the regulatory framework. Similarly, the availability of new funding may cause credit to rise at a faster pace than that of the supervisory capacity required to monitor its quality.

The benefit of such give-and-take is a safer global financial system that benefits all countries. Positioning regulation for technological innovation and cyber risks Let me move now to the second key priority of financial regulation going forward – positioning for the technological innovation sweeping the industry and the challenge of cyber security. FinTech or the application of technology to financial services is transforming as well as disrupting the industry. Digital payments are becoming more widespread, propelled by advances in near-field communications, identity authentication, and biometrics. Internet-enabled distribution platforms are emerging that make financial products directly available, e.g. peer-to-peer lending, crowd-funding, and pay-as-you-use insurance models. The smartphone is becoming your bank, your insurance broker, and your investment adviser. Blockchains or distributed ledger systems are being tested for a variety of financial operations – to settle interbank payments, to reconcile trade finance documentation, to execute performance contracts. Cloud technology is being used to store large volumes of data at low cost and retrieve them on-demand. Big data – aggregating and analysing large data sets, including through the use of sensor networks and natural language processing – is being used in many areas of finance: to gain richer insights into customer needs, to detect fraud in financial transactions, to sharpen surveillance of market trends. Regulating FinTech How should regulation deal with FinTech? First, we need to develop a deep understanding of these emerging technologies and the risks and opportunities they present. Financial regulators should not be afraid to work collaboratively with financial institutions or even FinTech companies.