and how potentially difficult cross - border crisis management and bank resolution would turn out to be in the european context. but there were also very important elements missing from my list – elements that have turned out to be of major importance for the unfolding of the crisis and the reform agenda. key among them are the interaction between sovereign debt and banking fragility and the problem of big banks in small countries – of which my country, iceland, was a prime example and cyprus is the latest. i will expand on this shortly. the financial crisis and the policy responses to it, especially some of the drastic decisions taken in the heat of intense crisis management, have changed the structure of the financial sector and will do so more profoundly going forward. there are several reasons for this, such as the plain collapse and disappearance of financial institutions, the non - viability of certain business models and practices in the new environment, the need for the financial sector to shrink and deleverage after the real risks in this world had been revealed, the intended and unintended consequences of new prudential regulation, the coming effects of structural regulations that at least partly ring - fence insured deposits and payment systems from the “ casino ”. then there is the shrinking of cross - border banking through the retreat of banks see http : / / www. bis. org / speeches / sp081119. htm bis central bankers ’ speeches behind their national borders and the weakening and, in some cases, collapse of international financial centres in smaller countries. we can see where this is heading : towards a financial sector that is smaller, less leveraged, less complex, more fragmented, more regulated, and more national. some of that is inevitable, and some retrenching from the excess levels of finance in relation to the real economy is probably beneficial at this stage, both at the national and the global level. the risk, however, is that the process could go too far. yes, there are risks to financial globalisation, but there are also benefits. in order to reap those benefits, we need a safer framework for cross - border banking at the regional and global level and some ground rules for capital flows and capital controls. let me briefly turn my own country, iceland, into a case study of some of the issues involved. during the financial crisis, three small european countries that had relatively big banking systems but no apparent fiscal problems prior to the crisis have suffered very serious financial and economic crises. these are iceland

13 april 2023 monetary and fiscal dimensions of responding to multiple global shocks presentation at the 15th annual meeting of the oecd working party of parliamentary budget officials and independent fiscal institutions by rannveig sigurðardottir, deputy governor for monetary policy, central bank of iceland it is a pleasure to join you here to discuss the role and interaction of monetary and fiscal policy - a topic that deserves our full attention today in times of high inflation. the global economy had barely recovered from the financial crisis when it was hit again by two subsequent shocks that have had enormous impact on both monetary and fiscal conditions around the globe. i want to give you a snapshot of how the icelandic economy has weathered these shocks relative to other oecd economies, firstly, during the covid - 19 pandemic and subsequent supply - chain disruptions, and then, following russia ’ s invasion of ukraine, the ensuing energy and food crises. finally, i will discuss the role played by monetary and fiscal policies in response to these shocks. iceland was among the countries most severely hit by the global financial crisis ( gfc ). prior to the crisis, the country was uniquely vulnerable due to macroeconomic imbalances, including a large current account deficit, unfavourable net international investment position, highly indebted households and business sector, inflated asset prices, and an oversized and undercapitalized banking sector. iceland ’ s strength, on the other hand, was the relatively strong position of its public finances. this set iceland apart from several other countries that also suffered badly from the gfc, mainly because of vulnerability of public finances. in the aftermath of the crisis, the economy was rebalanced ; the current account transformed from a deficit to a surplus ; the international investment position changed from large net debt to significant net assets ; a major share of private debt was wiped out ; the banking system recapitalized ; and asset prices deflated. the economic consequence of the pandemic as a result of the rebalancing of the economy following the financial crisis, iceland ’ s economy was in a position of relative strength when the pandemic struck. the macroeconomy remained broadly balanced, despite a negative shock to exports in 2019. unemployment was low, private sector indebtedness relatively benign, inflation moderate and public finances had recovered significantly from the turmoil following the gfc. the human suffering from the pandemic was also less pronounced than in many advanced economies. iceland ’ s