Here the issue is that, with ongoing global financial integration, the interest rate channel of monetary transmission weakens in SOFIEs, as longer domestic rates increasingly co-move with longer rates in the big countries. Inflation targets could still be reached through the exchange rate channel, but exchange rates are not necessarily smooth reflections of underlying fundamentals. Instead they tend to be excessively volatile and are sometimes misaligned for protracted periods. UIP does not hold, except at long horizons, and even then, often through sharp and disorderly corrections. This, in turn, gives rise to two concerns: first, regarding detrimental effects on the traded goods sector (for example, New Zealand and Iceland prior to the crisis), and second, regarding financial stability, where volatile capital flows, currency mismatches, and rollover risk of foreign currency debt are among the key players. Adverse effects on financial stability can be particularly severe when a blocked interest rate channel and an erratic exchange rate channel interact badly with other economic and financial risks that can face SOFIEs – such as the global credit cycle, domestic financial vulnerabilities, policy conflicts, and asymmetric shocks. This was the case in Iceland. This is a more difficult problem to solve than the one of international banks in small countries. There are problems with completely free capital movements, but there are substantial potential efficiency gains as well. You can enter a monetary union, of course, and thus stop being small in a monetary sense, but that has its own pros and cons, which I will not discuss here.

For consumers, they could mean more choice; better-targeted services; and keener pricing. For everyone, FinTech may deliver a more inclusive financial system, domestically and globally; with people better connected, more informed and increasingly empowered. 2  1  Especially the balance between inside money (created by commercial banks) and outside money (created by central banks). 2  FinTech could play a role in helping to address a worrying decline in the provision of correspondent banking services which support cross-border payment and settlement. Half of emerging market and developing economy jurisdictions, three quarters of large banks and a majority of local and regional respondent banks recently reported a decline in such services. Know-your-customer utilities and potentially distributed ledger technologies  2  BIS central bankers’ speeches  These benefits spring from FinTech’s potential to deliver a great unbundling of banking into its core functions of settling payments, performing maturity transformation, sharing risk and allocating capital. This would mean revolution, fundamentally re-shaping the financial system. At the same time, some financial technologies could make incumbent banks more efficient and profitable, reinforcing existing economies of scale and scope in banking. This would mean a restoration, reinforcing incumbents’ power. The balance of these forces may yield a third alternative – a reformation – a more diverse, resilient and effective system for consumers. One where large banks exist alongside new entrants who compete across the value chain.