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1、Navigating Global Financial System FragmentationI N S I G H T R E P O R TJ A N U A R Y 2 0 2 5In collaboration with Oliver WymanImages:Getty Images,ShutterstockContentsForeword 3Executive summary 4Introduction 81 Past,present and future of the global financial system 91.1 The US dollars centrality 1

2、01.2 Integration of a global system 111.3 Use of the financial system for economic statecraft 121.4 Multipolarity and pressures for fragmentation 142 What are the costs of a fragmented financial system?162.1 Macroeconomic impact 162.2 Impact on EMDEs 202.3 Impact on financial institutions 223 Guardr

3、ails to protect the global financial system 253.1 Principles to Safeguard the Global Financial System from Fragmentation 253.2 Rules of Engagement for Responsible Economic Statecraft 283.3 A positive vision for the financial system 314 Policy recommendations:A framework for action 324.1 Contend with

4、 existing financial fragmentation 334.2 Resist further system fragmentation 354.3 Reform the global financial system 364.4 Concluding thoughts 37Appendix:Key terminology 38Contributors 39Endnotes 42Disclaimer This document is published by the World Economic Forum as a contribution to a project,insig

5、ht area or interaction.The findings,interpretations and conclusions expressed herein are a result of a collaborative process facilitated and endorsed by the World Economic Forum but whose results do not necessarily represent the views of the World Economic Forum,nor the entirety of its Members,Partn

6、ers or other stakeholders.2025 World Economic Forum.All rights reserved.No part of this publication may be reproduced or transmitted in any form or by any means,including photocopying and recording,or by any information storage and retrieval system.Navigating Global Financial System Fragmentation2Th

7、e global financial system is among the most interconnected and interdependent ecosystems in the world.Global cross-border bank credit stands at nearly$40 trillion,roughly the size of the GDP of the United States,Germany,Japan and India combined.Bond issuances by governments and corporates totalled$9

8、 trillion in 2024,with investors allocating an additional$600 billion to global bond funds.The total value of cross-border payments in 2023 was estimated at more than$190 trillion.For decades,this system has served as the engine for global economic growth through its financing of the real economy.It

9、 is composed of an interconnected network of actors,both domestic and international,including central and commercial banks,investment firms and insurers,and regulators,all of which work together to allocate resources,manage risks and provide necessary liquidity.Its functioning promotes growth,stabil

10、ity and integration by moving the funds required for development and commerce,supporting individuals,corporates and governments.Like any social system,it has developed around a common set of rules,principles and norms,both explicit and implicit,that functionally underpin the systems architecture and

11、 establish trust between its actors,allowing firms to conduct business across borders.These elements include respect for property ownership rights,the fundamental rule of law and the independence of fiscal and monetary policy.They have allowed the system to contend with disruptions,both chronic conc

12、erns and shocks,the most famous being the global financial crisis.Financial institutions acted together to save the system such as when the US Federal Reserve used swap lines to provide emergency dollar liquidity to 14 central banks both out of societal obligation and self-preservation.This understa

13、nding,however,is increasingly at risk in a complex geopolitical environment defined by excessive fragmentation,multipolarity and the growing use of geoeconomic statecraft.More and more,states seek to use the global financial system to advance geopolitical objectives.This poses a threat to the very i

14、ntegrity of the system and will have costs at a macroeconomic level as well as for financial institutions,ranging from asset stranding and valuation volatility to reduced liquidity and credit-rating risks.The Navigating Global Financial System Fragmentation initiative convenes more than 25 chief exe

15、cutives,chairpersons and other global finance leaders to reinforce the integrity of the financial system at this moment of rising geopolitical complexity.This report aims to clearly articulate and codify those core rules,principles and norms that can preserve the system while also making the case fo

16、r the immense opportunity provided by enhanced coordination and integration.The report represents a call to action from the private sector to protect the global financial systems most essential elements,without undermining national security or sovereignty.By considering these frameworks,policy-maker

17、s can establish the necessary conditions for efficient capital markets and enable continued economic growth for decades to come.Navigating Global Financial System FragmentationJanuary 2025ForewordMatthew Blake Head,Centre for Financial and Monetary Systems;Member of the Executive Committee,World Eco

18、nomic ForumTed Moynihan Managing Partner,Global Head of Industries,Oliver Wyman(Marsh McLennan)Navigating Global Financial System Fragmentation3Executive summaryAn integrated global financial system supports livelihoods and underpins economic growth.This report proposes eight principles to protect t

19、he systems integrity and rules of engagement to put them into practice.Financial integration powers economic growth and makes capital available to entrepreneurs,corporations,governments and citizens.The global financial system connects institutions,regulators and technologies to facilitate capital e

20、xchange across borders.Its interconnections have supported recent decades of economic growth and human development.In the quarter-century between 1990 and 2015,more than 1 billion people worldwide were lifted out of poverty.1 To continue this growth path,a well-functioning and integrated financial s

21、ystem that mutually benefits all countries is necessary.The current trajectory of the global financial system,however,suggests that the 21st century may see a more fragmented financial architecture.Russias 2022 invasion of Ukraine,and the corresponding responses from Western governments to restrict

22、Russias access to the global financial system,represented an inflection point that accelerated fragmentation.Market participants are increasingly basing decisions not just on return-maximization but also on geoeconomic considerations,triggering a shift away from the previous globalized model.To adva

23、nce domestic economic priorities and national security imperatives,policy-makers must often accept trade-offs that cause fragmentation and might,for instance,reduce the efficiency of international finance a certain degree of fragmentation is likely necessary to achieve desired policy outcomes.At the

24、 same time,financial regulators recognize the benefits of financial integration and minimizing the burdens placed on legitimate economic activity.For several decades,improvements in technology,innovation and governance have made it possible to increase efficiency while reducing regulatory friction.I

25、n recent years,however,regulatory friction has increased in tandem with growing geopolitical tensions,leading to what many observers describe as excessive fragmentation.Fault lines are emerging within the global financial system,with cracks beginning to show across both regions and levels of economi

26、c development.Despite the international order and financial system becoming more multipolar,analysis suggests that a globalized system is likely to persist in the near term.As more governments prioritize the use of economic statecraft(i.e.the economic tools and policies a state uses to achieve forei

27、gn policy and domestic objectives),however,there is a risk of further financial system fragmentation.Navigating Global Financial System Fragmentation4The potential risks of financial fragmentation make a strong case for policy-makers and financial actors to choose a different path of reinforcing the

28、 global financial system by enhancing regulatory cooperation and further standardizing frameworks for financial transactions.By integrating emerging technologies such as blockchain and artificial intelligence(AI),countries may help improve transparency and efficiency in cross-border payments.Multist

29、akeholder cooperation can strengthen financial governance and help mitigate systemic risks,ensuring that financial markets operate fairly and effectively.This approach promotes stability and resilience in the global economy,promoting trust among stakeholders.The costs of financial system fragmentati

30、onAs nations have increasingly sought to protect their financial systems from external threats,new challenges have arisen,prompting regulatory and institutional shifts designed to enhance resilience,support domestic industry and insulate supply chains from external shocks.For example,following the C

31、OVID-19 pandemic,many nations invested in“friend-shoring”to reorient supply chains in ways that afforded them greater protection over critical infrastructure.Such regulatory and institutional efforts can insulate certain sectors but also increase the complexity of the corresponding financial infrast

32、ructure and uncertainty for investors,thereby reducing liquidity,which can cause numerous unintended consequences and knock-on effects.This report represents a concerted effort among global financial actors to assess these impacts,mitigate the negative consequences of fragmentation and propose found

33、ational principles that can strengthen the financial system even amid geopolitical reconfigurations.Financial system fragmentation can have a negative impact by decreasing global economic output and increasing inflation.This report presents new analysis indicating that one-year economic output losse

34、s from fragmentation could range from$0.6 trillion to$5.7 trillion,or about 5%of current global gross domestic product(GDP)and twice the output losses caused by the COVID-19 pandemic,depending on the degree of fragmentation.Similarly,inflation rises steadily in most countries as fragmentation increa

35、ses,which is likely to necessitate higher interest rates and have an impact on borrowing costs for individuals,businesses and governments.Another consideration is that fragmentations negative effects will not be distributed equally around the world.Instead,countries or regions that lack sufficiently

36、 deep or integrated capital markets will be affected more significantly.According to the reports analysis,emerging markets and developing economies(EMDEs),not including China or Russia,could see GDP losses of nearly 11%.These changes may force smaller EMDEs to seek alternative sources of funding out

37、side the traditional international system,further exacerbating fragmentation.This fragmented environment could complicate sovereign debt-relief efforts and erase previous progress in this area as creditors pursue separate bilateral negotiations with debtors.Geopolitics also affects private-sector de

38、cision-making by increasing policy uncertainty and making long-term strategic planning more challenging.Research suggests that businesses could see impacts on corporate credit,as rating agencies re-evaluate debt profiles across various jurisdictions and blocs.Other impacts include limited market acc

39、ess,as economic sanctions and other measures prohibit investors and companies from entering certain markets.Finally,asset valuations could be impacted,as weakened investor appetite limits deal opportunities,reduces liquidity and contributes to asset-stranding all of which increase valuation volatili

40、ty.Alternatively,private sector-led collaboration could offset geopolitical friction and financial fragmentation by linking actors across rival blocs.Financial intermediation tends to occur despite geopolitical tensions or even wars.As such,it offers a powerful tool for bringing actors together to a

41、ddress shared challenges,such as the energy and digital transitions,ageing populations and infrastructure investment,all of which require collective action.The guardrails outlined in this report are designed to protect the ability of the financial sector to fulfil its fundamental role of intermediat

42、ing global savings and channelling them to promote investment and economic growth,regardless of the geopolitical backdrop.Guardrails to protect the integrity of the global financial system In a recent speech,International Monetary Fund First Deputy Managing Director,Gita Gopinath,called on countries

43、 to“build resilience”,but warned that“in the absence of sufficient guardrails,we could end up with severe fragmentation of the global economy and consequently lower productivity and income levels for everyone”.2This report proposes specific guidelines to protect the systems integrity at a moment of

44、increasing geopolitical complexity.3 The use of the term“guardrail”does not suggest limits on national sovereignty.Instead,this reports guidelines,informed and articulated by private-sector leaders from across global financial services,provide a framework to guide future economic statecraft in ways

45、that safeguard the global financial system and facilitate ongoing integration,even in the face of geopolitical tensions.$5.7trillionPotential lost GDP as a result of fragmentation.Navigating Global Financial System Fragmentation5Clearly define and uphold the rule of law to ensure impartial enforceme

46、nt and predictability across the financial system Principle 1Regulate and manage critical financial market infrastructures,but avoid politicizing or severing the underlying financial rails,given that these systems are essential for maintaining the integrity,functionality and efficiency of the financ

47、ial systemPrinciple 5Respect financial and physical property ownership rights to maintain trust and encourage investment,thereby fostering financial stabilityPrinciple 2Ensure parallel financial market infrastructures are interoperable to facilitate optimal transactions and market efficiency Princip

48、le 6Avoid unilaterally expropriating sovereign assets even during times of heightened tensions or conflictPrinciple 3Structure domestic and multilateral policies and financial regulations to support financial stability and ensure cross-border flows of capital,data,goods,people and ideas Principle 7S

49、afeguard independence and bolster the capabilities of international institutions,such as standard-setting bodies,to preserve their role in global financial governancePrinciple 4Shield the independence of fiscal and monetary policy to promote financial stability,reduce the risk of competitive interfe

50、rence and increase opportunities for transparent decision-making Principle 8Principles to Safeguard the Global Financial System from FragmentationFIGURE 1Source:World Economic Forum and Oliver WymanThe Principles to Safeguard the Global Financial System from Fragmentation listed in Figure 1 assert t

51、he basic conditions that enable financial-services actors to conduct business across jurisdictions and whose protection preserves the integrity of the global financial system.Policy recommendations to establish guardrails By strengthening and reforming the system,policy-makers can ensure its integri

52、ty and guarantee that all actors,including EMDEs,have the ability to conduct business across jurisdictions.As global population and economic dynamics shift,global governance systems must adapt to ensure the financial system delivers maximum benefits.This report offers a pragmatic approach to transla

53、te the proposed frameworks into action that supports economic growth.Core policy recommendations include:anchoring guardrails through voluntary norms,which build on those outlined in this report;developing mutual recognition frameworks and interoperability between regulatory regimes;and countering f

54、ragmentation with new or strengthened patterns of economic cooperation and policy coordination.Design and implement targeted and well-aligned statecraft measures to minimize the risk of unintended consequences and reduce the private sectors administrative burden(e.g.carry out costbenefit analyses,pr

55、ovide clear implementation guidance,and assess and reinforce existing regimes)Rule 1Collaborate on areas of geoeconomic consensus,including combatting financial crime,terrorist financing and the energy transition,recognizing the need for collective action to address these global financial challenges

56、Rule 5Establish publicprivate consultation mechanisms to promote transparency in decision-making regarding the impact of economic statecraft measures on the financial system Rule 2Promote global financial stability through heightened coordination among major financial powers via transparent data sha

57、ring and inclusive decision-making to minimize negative spillovers and prevent system fragmentationRule 6Protect populations,sectors,industries and supply chains for humanitarian purposes through exemptions and carve-outs to avoid collateral damage and ensure their continued access to the global fin

58、ancial system Rule 3Reform the global financial system to reflect 21st-century geopolitical and macroeconomic dynamics and provide greater benefits to EMDEs,promoting inclusive economic growth and stabilityRule 7Prioritize the use of economic inducements,including trade agreements compliant with int

59、ernational law,and other financial instruments that foster mutual gain and cooperation over those designed to cause economic painRule 4Protect the ability of firms to engage with actors across the geopolitical spectrum by structuring statecraft measures,standards and regulations on a multilateral ba

60、sis,whenever possible Rule 8Rules of Engagement for Responsible Economic StatecraftFIGURE 2Source:World Economic Forum and Oliver Wyman The Rules of Engagement for Responsible Economic Statecraft proposed in Figure 2 operationalize these principles.They outline how policy-makers can deploy economic

61、statecraft to protect national security and sovereignty without reducing global prosperity.Navigating Global Financial System Fragmentation7IntroductionGlobal finance leaders are working together to establish norms and principles that safeguard the financial system in the face of geopolitical fragme

62、ntation.Recent political developments,combined with demographic shifts and changing economic trends,have reconfigured the landscape for global finance.Geopolitical fragmentation represents one of the most pressing issues affecting financial services on a global scale.4As a result,todays financial ac

63、tors face numerous challenges.In March 2024,the World Economic Forums Centre for Financial and Monetary Systems and Oliver Wyman launched the Navigating Global Financial System Fragmentation initiative,which brings together more than 25 chief executive officers,chairpersons and other global finance

64、leaders to understand the new landscape and define a common set of norms,rules and principles to safeguard the global financial system during a period of rising geopolitical complexity.This report proposes frameworks to protect the financial system,outlines the quantitative and qualitative costs of

65、fragmentation and provides policy-makers with guidance and tools to activate these frameworks that protect global prosperity.Navigating Global Financial System Fragmentation8Past,present and future of the global financial system1Historical developments since the 1970s have reinforced a unified globa

66、l financial system with the US dollar at its centre,but current trends point towards a more multipolar and fragmented future.For the past half-century,the global financial system has continuously evolved in its role as the world economys major artery.Finance has driven global growth by increasing cr

67、oss-border capital flows,enabling a more harmonized international regulatory environment and supporting rapid technological progress that improves the efficiency and reach of financial markets.Despite these gains,rising geopolitical tensions have changed the landscape in which todays financial syste

68、m operates,and these conditions necessitate a re-evaluation of the key pillars supporting the current system.Understanding the foundation of todays system can help inform decision-making to safeguard it for the future.Navigating Global Financial System Fragmentation9Timeline of key events in the glo

69、bal financial systems evolutionFIGURE 3Foundation of the modern global financial system1971:US President Nixon ends Bretton Woods system,delinking US dollar from gold standard1973:First oil crisis creates global economic turbulence1974:Establishment of petrodollar system between the United States an

70、d Saudi Arabia1979:Second oil crisis reinforces dollars dominanceLate 1970s:Key institutional changes at US Federal Reserve begin long-term disinflation trendFinancial globalization and new technologies Early 1990s:Broader adoption of real-time gross settlement systems transforms transaction capabil

71、ities1991:Soviet Unions collapse accelerates financial globalization1995:World Trade Organization(WTO)establishment creates new framework for trade/financial integrationLate 1990s:Rise of electronic trading platforms and internet-based finance Multiple regional financial crises prompt regulatory ref

72、orms1999:EU introduces euro as an accounting currency,used by 11 member statesFragmentation pressures Early 2010s:Rise of fintech and cryptocurrency alternatives2013:China announces Belt and Road Initiative2013:Federal Reserve surprises markets by announcing the tapering of asset purchases2014:US an

73、d EU impose sanctions against Russia after Crimea annexation2016:Brexit vote signals anti-globalization sentiment2018:USChina trade war begins2020:COVID-19 prompts supply-chain restructuring2022:Russias invasion of Ukraine reveals global fault lines US and EU freeze$282 billion in Russian central ba

74、nk assets EU regulations mandate SWIFT to disconnect seven Russian banks Global deregulation and integration 1980s:Major financial deregulation and innovation period begins Easing of foreign exchange controls Expansion of derivatives markets EMDEs shift to export-led growth strategiesContinued integ

75、ration and crisis2001:Two pivotal events:China joins WTO,boosting global growth 9/11 attacks lead United States to use financial system as counterterrorism tool2008:Global financial crisis halts rapid financial sector expansion2009:G20 emerges as key coordinator of regulatory response Creation of Fi

76、nancial Stability Board Development of Basel III framework1990s2010s2020s1980s2000s1970sThe US dollars emergence as the foundation of the global financial system stemmed from deliberate policy choices and the unique economic position of the United States in the post-Second World War era through the

77、Bretton Woods system.This international order pegged major international currencies to the US dollar,which itself was pegged to gold,in order to ensure exchange rate and monetary stability,prevent competitive devaluations and promote economic growth through trade.The modern financial system has evol

78、ved since the end of the Bretton Woods system in ways that have affirmed the US 1.1 The US dollars centralitySource:World Economic Forum and Oliver Wyman Navigating Global Financial System Fragmentation10dollars centrality.5 When US President Richard Nixon suspended the gold convertibility of the US

79、 dollar in 1971,some contemporaries viewed the move as a signal of the dollars weakness.However,a series of historical forces and events converged to increase the dollars centrality in subsequent years.The underlying strength of the US economy,the absence of viable alternative currencies and the eme

80、rgence of the“petrodollar”system resulted in the US dollar maintaining its core role in the emerging financial order.A linchpin of the system involved a US arrangement with Saudi Arabia in the 1970s to ensure that the global oil trade would be conducted in dollars,which created a perpetual source of

81、 dollar demand.6The US dollar became increasingly central to the development of the global financial system in subsequent years,due to structural and institutional factors.Deep and liquid US financial markets,combined with relatively predictable monetary policy,strong legal frameworks and political

82、as well as institutional stability maintained the currencys appeal for international transactions and reserves.Moreover,the US dollars entrenched role in global trade and commodity pricing and its widespread use in international contracts created powerful network effects that resist change.The 1980s

83、 and 1990s saw the formation of a truly integrated global financial system through three parallel developments.First,financial deregulation and innovation created interconnected global capital markets.The easing of foreign exchange controls and expansion of derivatives markets enabled unprecedented

84、capital mobility.7 For instance,the estimated outstanding stock of international bonds increased from$260 billion to$1.4 trillion between 1982 and 1990.8 This deregulation coincided with many emerging markets(EMs)shifting from import-substitution strategies to export-led growth,further integrating g

85、lobal finance and trade.9Technology played a crucial role in enabling this integration.The introduction of real-time gross settlement(RTGS)systems dramatically reduced settlement risk and contributed to more efficient cross-border transactions.Electronic trading platforms and the internet transforme

86、d financial markets,enabling faster trading(for example,the US stock market moved from a T+5 to a T+3 settlement cycle in 1995),better price discovery and improved access to information.10 These technological advances significantly reduced the costs of international financial transactions and simult

87、aneously increased their speed and reliability.International arrangements further solidified the institutional framework for global integration.The establishment of the World Trade Organization(WTO)in 1995 created a more unified global trading system that encouraged financial integration.Most of Eur

88、opes largest economies further integrated their markets by adopting the euro as their common accounting currency in 1999.Chinas 2001 WTO accession marked another crucial milestone,integrating the worlds then-most populous nation into global markets.11 The 2007 US housing downturn,which triggered the

89、 global financial crisis,revealed the risks of integration but ultimately led to stronger international regulatory coordination through new institutions such as the Financial Stability Board(FSB)and the Basel Committee on Banking Supervision(BCBS).Cumulatively,these trends converged to create dramat

90、ic increases in foreign direct investment,which grew from 0.5%of global GDP in 1970 to a high watermark of 5.3%of global GDP in 2007,just prior to the 2008 crisis.12 1.2 Integration of a global systemThe historic role of the US dollarBOX 1The Bretton Woods system established the US dollar as the glo

91、bal reserve currency.Growing fragmentation of the global financial system is partly fuelled by countries and companies seeking to mitigate the perceived risks associated with US dollar dependence such as changes in US monetary policy affecting global liquidity and other financial conditions.Neverthe

92、less,the US dollar is likely to maintain its dominance for the foreseeable future,given strong US fundamentals,a lack of credible alternatives and its powerful and entrenched network effects.The euro faces limitations due to the Eurozones economic and political fragmentation,while the renminbi is co

93、nstrained by its controlled capital account and lack of full convertibility.Other currencies suffer from insufficient scale and liquidity.Central banks prefer holding dollar reserves due to the currencys stability and liquidity,and,accordingly,the dollar maintains a dominant share of global foreign

94、exchange reserves.Global trust in the US economic and financial systems and confidence in the US governments ability to meet its financial obligations collectively make the scenario of continued dollar dominance the most likely outcome.The strength of the US economy,the absence of viable alternative

95、 currencies and the emergence of the petrodollar system led to the US dollar maintaining its core role in the emerging financial order.Navigating Global Financial System Fragmentation11FIGURE 4Share of global exchange reserves,global export invoicing and foreign transaction by currencyWhile the US d

96、ollar will likely continue to play a significant role as a reserve and funding currency,it is becoming less dominant as a medium of exchange for financing goods and services trade.Amid a trend towards greater trade regionalization,the renminbi and euro are expected to become more important within As

97、ian and European trade.13 Data from October 2024 shows that the renminbi is the second largest global currency in the trade finance market,with a share of 5.8%,just ahead of the euro but behind the US dollar,which has a share of around 83%.14 Digital currencies,including wholesale central bank digit

98、al currencies(CBDCs),could provide alternative cross-border payment rails,creating a more diverse global financial landscape.Moreover,rising debt levels in the United States raise questions about debt sustainability,while growing domestic political polarization could undermine the independence of US

99、 institutions.Over time,these developments could reduce confidence in the dollar and lead to a more multipolar currency system.Even as financial integration continued to deepen in the 2000s,challenges to the system began to emerge.A crucial turning point came after the terrorist attacks on 11 Septem

100、ber 2001,which shifted some governments view of the financial system not just as economic infrastructure,but as a powerful tool of economic statecraft.Economic statecraft broadly refers to the use of economic tools and policies by a state to achieve its foreign-policy and domestic objectives.Such me

101、asures can include punitive steps such as sanctions,designed to pressure norms-violating countries and to protect the issuing governments interests,as well as inducements,such as trade agreements aimed at improving relationships and fostering cooperation.1.3 Use of the financial system for economic

102、statecraftGlobal exchange reservesShare of export invoicingShare of daily foreign transactionsBillions of US dollars%GBPEURRMBJPYUSD0102030405060708090100010203040506070809010058%20%6%2%48%$88$31$13$17$722%7%4%4%5%Note:To calculate share of export invoicing,project team used the Bloomberg Intelligen

103、ce FX Strategy Dashboard and Global SWIFT data as a proxy using inbound and outbound traffic processed via SWIFT.To calculate share of foreign transactions,project team used the turnover of OTC foreign exchange instruments by currency,“net-net”basis,2022 daily averages in billions of USD.Source:Shar

104、e of global foreign exchange reserves:IMFs Currency Composition of Official Foreign Exchange Reserves Q2 2024.Share of export invoicing:Bloomberg Intelligence FX Strategy Dashboard.Share of foreign transactions:BIS Triennial Survey,Data Portal.Oliver Wyman analysis Economic statecraft broadly refers

105、 to the use of economic tools and policies by a state to achieve its foreign-policy and domestic objectives.Navigating Global Financial System Fragmentation12CategoryComponentDescriptionExampleEconomic sanctionsFinancial sanctionsFreezing assets,restricting access to financial markets,prohibiting an

106、d blocking transactionsFreezing assets of military officials for human rights abusesTravel bansDenying visas or entry to individualsBanning visas for officials linked to corruptionSectoral sanctionsSanctions targeting specific sectorsSanctioning the energy sector for environmental violationsSecondar

107、y sanctionsPenalties on third parties engaging with sanctioned entitiesThreatening sanctions on firms trading with a sanctioned nationTrade policiesTariffsTaxes on imported goods to protect domestic industriesImposing tariffs on imported steel to protect local industryQuotasLimits on the quantity of

108、 specific goods imported/exportedSetting quotas for dairy imports to support local farmersTrade agreementsBilateral/multilateral agreements to reduce trade barriersNegotiating a trade deal for economic cooperationAnti-dumping measuresPolicies to prevent below market-value sales by foreign companiesE

109、nforcing duties on textiles sold below market valueSubsidiesFinancial support for domestic industriesAllocating subsidies for renewable energy projectsInvestment controlsScreening mechanismsReview processes for foreign investments based on security and stabilityConducting security reviews of foreign

110、 investmentsOwnership restrictionsLimits on foreign ownership in certain industriesRestricting foreign ownership in telecommunicationsSectoral restrictionsProhibitions on foreign investment in critical sectorsBanning foreign investment in defence for security reasonsPerformance requirementsCondition

111、s for foreign investors(e.g.technology transfer)Requiring local partnerships for foreign tech firmsExport controlsLicensing requirementsGovernment approval needed for certain exportsMandating licences for sensitive technology exportsProhibited destinationsBans on exporting to specific countries/regi

112、onsProhibiting exports to nations under sanctionsControlled technologiesRestrictions on advanced technology exportsLimiting dual-use technology exports to prevent military useEnd-use monitoringEnsuring that exported goods are used as intendedChecking military equipment for compliance with agreements

113、Aid and assistanceDevelopment aidFinancial support for economic development and infrastructureProviding aid for infrastructure in low-income countriesHumanitarian aidEmergency assistance for crisesDelivering aid to communities affected by disastersTechnical assistanceExpertise and training for gover

114、nance and capacity-buildingOffering training to improve public health systemsMilitary aidSupport for defence,including funding and trainingProviding military training and equipment to allies facing threatsTABLE 1Economic statecraft a deep diveSource:Oliver Wyman analysisEconomic statecraft can drive

115、 fragmentation by directly disrupting the operation of the financial system.For instance,in response to the September 11 attacks,the US government systematically used the global financial system to track and disrupt terrorist financing.The effort to combat terrorist financing was recognized by the i

116、nternational community and became institutionalized via the intergovernmental Financial Action Task Force(FATF).The United States developed sophisticated capabilities to monitor and control international financial flows,which it continued to leverage over the next two decades.15 The dollars centrali

117、ty as a reserve currency gave US policy-makers leverage to advance foreign policy goals through economic tools such as sanctions.Navigating Global Financial System Fragmentation13FIGURE 5Number of active sanction designations by the US Treasury20102023,in thousands20102011201220132014201520162017201

118、820192020202120222023+6%+8%+23%4.75.15.55.86.06.26.46.97.88.59.19.411.914.3RussiaUkraine WarSource:Oliver Wyman Forum x NYSE CEO Survey 2024.Oliver Wyman Forum analysisFundamental changes to the architecture of the global financial system are both readily observable and accelerating.The dollars shar

119、e of global reserves has declined from 71%in 1999 to 58%in 2024,underscoring the ongoing trend towards a more multipolar financial system.16 At the same time,in response to the COVID-19 shock and subsequent supply-chain disruptions,advanced economies adopted industrial policies to increase the resil

120、ience of their domestic economies.Russias invasion of Ukraine,and the corresponding Western sanctions regimes,acted as a further trigger,accelerating geoeconomic fragmentation and initiating a shift away from the previously globalized economic model.17 Increasingly,financial system participants are

121、making decisions based not only on maximizing returns but also on geoeconomic considerations.The rise of industrial policies and nations growing concern about the self-sufficiency of their economies and financial systems can reduce or 1.4 Multipolarity and pressures for fragmentationWhile many econo

122、mic statecraft instruments,including sanctions,are designed to disrupt the economic activities of targeted entities,unintended consequences can exacerbate their impacts.Since geopolitical actions are difficult for financial markets to anticipate and hedge against,they prompt actors to take risk-aver

123、se positions.Such behaviours can create further market dislocation and establish negative feedback loops.Targeted investment restrictions can have a similar effect.While these restrictions may not affect investors returns in the short term,they restrict liquidity and increase capital costs in the lo

124、ng term.Investment restrictions can also go beyond shielding those sensitive sectors,raw materials and companies that policy-makers deem vital for national security or domestic resilience,by impacting a sectors“investability”and affecting asset allocation decisions and investment plans.Economic stat

125、ecraft measures can therefore have systemic impacts on the global financial system and economy.Western sanctions on Russia following its invasion of Ukraine in 2022 represented the most significant escalation in the use of finance to advance geopolitical objectives.The United States,the European Uni

126、on and other partners froze nearly$300 billion in Russian central bank reserves,compelled financial market infrastructures to disconnect Russian institutions from their systems,cutting off direct access to global financial markets,and implemented debt and equity listing restrictions.Decline in dolla

127、rs share of global reserves since 1999.Navigating Global Financial System Fragmentation14FIGURE 6Industrial policies a deep diveAspectGoalUS Inflation Reduction ActEU European Chips ActMade in China 2025Make in IndiaUpgrade Chinas manufacturing capabilities and reduce foreign tech relianceHelp US to

128、 reach climate goals,strengthen energy security and job market,reduce cost of healthcare Strengthen semiconductor industry in EU by ensuring resilience of supply chains and reducing external dependenciesBoost domestic manufacturing and attract foreign investmentManufacturing,information technology,e

129、nergy,aerospace and maritime engineeringEnergy,manufacturing,healthcare,transportation,agricultureSemiconductors,information technologyManufacturing,electronics,textiles,automotiveInvestment volume$300 billion planned investment by 2025$369 billion allocated for energy and climate initiatives+100 bi

130、llion planned investment including+43 billion public investments+$26 billion in incentives across various sectorsKey sectorsSource:Griffith Asia Institute.UNCTAD Investment Policy Monitor.Indian Ministry of Commerce&Industry.Oliver Wyman analysisTechnological innovation can also accelerate the trend

131、 towards multipolarity.Over 90%of central banks are now exploring CBDCs,which could enable alternative payment channels that bypass traditional fiat-based systems.19 Examples include Chinas e-CNY CBDC and the mBridge multi-CBDC platform for cross-border payments,which offer alternative platforms for

132、 financial connectivity.If countries begin to adopt wholesale CBDCs without first putting a harmonized and interoperable regulatory framework in place,the global financial system could see the emergence of multiple digital currency ecosystems.20 This could create a more fragmented international mone

133、tary system and pose financial stability risks.21 The institutional framework for global governance is also showing signs of strain.Since 2019,the WTO Appellate Body has been unable to issue decisions,resulting in countries pursuing more regional trade agreements,which accelerates the formation of r

134、egional trading blocs and drives fragmentation.22 Similarly,the G20 has faced challenges coordinating global responses on issues ranging from financial governance to the energy transition.Without greater international coordination,other forums such as such as the BRICS Intergovernmental Organization

135、 and Group of 7(G7)may devise separate approaches.Specific examples are mentioned later in this report.These developments reveal that the success of global financial integration has made the underlying system a powerful geopolitical tool,but its unprecedented efficiency contributes to its vulnerabil

136、ity to the consequences of economic statecraft.Meanwhile,technological innovation offers new possibilities for creating parallel financial systems that could bypass or shift the existing global order.The challenge ahead lies in managing a more multipolar world and increasing fragmentation while stil

137、l preserving the benefits of global financial integration that have facilitated decades of economic growth.redirect cross-border capital flows and increase regulatory divergence.In the past decade or so,all major economic powers have enacted new industrial policies,such as Chinas Made in China 2025,

138、the Inflation Reduction Act in the United States and the EUs European Chips Act(see Figure 6).While the structure,scale and intent of such policies can vary,they all use a mixture of subsidies,investment restrictions,tariffs and export controls to foster industries or objectives viewed as essential

139、to national interests.18 The challenge ahead lies in managing a more multipolar world and increasing fragmentation while still preserving the benefits of global financial integration that have facilitated decades of economic growth.Navigating Global Financial System Fragmentation152What are the cost

140、s of a fragmented financial system?A fragmented global financial system can negatively affect GDP and increase inflation,particularly for EMDEs.Policy-makers can help drive economic growth through deepened financial integration.From a macroeconomic perspective,the potential risks and costs of geoeco

141、nomic fragmentation are substantial.This report estimates that the global costs of fragmentation could amount to approximately$5.7 trillion or about 5%of current global GDP.A more fragmented global order will in most instances act as a cost driver.In industries with higher exposure to geoeconomic fr

142、agmentation,firms have shifted from“just-in-time”production models to costlier“just-in-case”approaches that diversify portfolios and supply chains.Such measures can increase resilience but also increase costs.Investment restrictions,export controls and tariffs can result in inefficient reorganizatio

143、ns of portfolios and supply chains,increasing global inflation.One illustrative example is a US government rule from October 2024 limiting investment in Chinese high-tech sectors.23 Another is the Chinese governments export restrictions on rare earth metals and minerals,which are essential to produc

144、e high-tech products,including semiconductors and lithium batteries.24 While these measures may be designed to protect respective national security interests,they can increase costs for consumers and businesses.Geopolitical pressures can also reduce liquidity throughout the financial system,as natio

145、ns erect new barriers to foreign exchange markets,cross-border transactions and investment flows.IMF research indicates that a significant increase in geopolitical tensions between two countries can“reduce bilateral cross-border portfolio and bank allocation by about 15%”.252.1 Macroeconomic impactB

146、usiness mitigation strategies:Consider broader risk analysisIncorporating geoeconomic factors into their non-financial risk assessments allows financial institutions to identify and assess a broader range of risks,enhancing their overall risk management framework.Regulatory divergence,another potent

147、ial consequence of geoeconomic fragmentation,can also raise compliance costs for the public and private sector.Growing geopolitical divides make it more difficult for financial governance institutions to share data,improve transparency,harmonize regulations and build trust.Such divergence can drive

148、the growth of parallel but incompatible financial market infrastructures(FMIs),which increases costs and complexity.As geoeconomic competition intensifies,increasing regulatory divergence can lead to the emergence of economic blocs with largely separate payment systems,regulations,supply chains and

149、technology ecosystems.A major risk to the financial system arises less from the intended policy objectives than from the unintended consequences of policy-driven fragmentation.Recent history presents examples of policy-makers electing to accept fragmentation to advance other goals,such as preventing

150、 systemic contagion or insulating supply chains from COVID-19 shocks.Such policies may result in small efficiency losses that policy-makers deem acceptable to ensure the supply of certain critical goods.However,an unintended consequence of these measures may be a tendency for countries to reorient i

151、nternational trade to focus on geopolitically Potential reduction in bilateral cross-border portfolio and bank allocation due to an increase in geopolitical tensions(IMF).Navigating Global Financial System Fragmentation16aligned blocs.This decoupling scenario would pose a significant threat to the g

152、lobal trading system as it currently exists,with potentially significant costs as a percentage of global GDP.26 From a financial sector perspective,the development of separate technological ecosystems could force multinational financial companies to build costly redundancies to comply with different

153、 standards.Similarly,countries might be compelled to align themselves with one of the competing technological standards.Fragmentation also reduces the capacity to share and diversify risks,thereby making the system more vulnerable to shocks.27 The emergence of economic blocs could shift financial fl

154、ows,making them more regionally concentrated rather than globally integrated.With fewer opportunities for geographic diversification,investors portfolios would be limited to certain country blocs and thus more susceptible to shocks.Countries reliance on bloc-specific currencies could also“complicate

155、 the balancing of global financial flows in the long term”.28 A less robust global financial safety net(GFSN)would heighten the likelihood of financial crises and might necessitate central banks in economies with less-developed capital markets to build up costly liquidity and capital buffers.29 An u

156、nstable financial system also increases the risk of price volatility.30Quantitative assessment of global geoeconomic fragmentation costsTo better highlight the risks and costs of a fragmented financial system,this report uses an econometric model to measure the potential macroeconomic impacts of var

157、ious geoeconomic scenarios.The model measures the impact of geoeconomic fragmentation,broadly(i.e.the impact of fragmentation on the whole economy rather than only the financial system),which includes proxies for financial system fragmentation,specifically,via shocks to productivity,reduced financia

158、l flows,etc.The model produces two key findings:Geoeconomic fragmentation has a consistently negative impact on global output.Analysis in this report suggests that economic output losses could range from$0.6 trillion to$5.7 trillion,or about 5%of global gross domestic product(GDP)in the short term.B

159、y comparison,the COVID-19 pandemic caused global output losses of approximately 2.5%.In the long term,as economies and financial actors adjust to deeper fragmentation,output losses could be as high as about 4%of global GDP growth.Geoeconomic fragmentation is a driver of inflation.Inflation rises ste

160、adily in most countries as fragmentation increases.A decoupling of the global financial system and economy into two distinct blocs could increase global inflation by more than 5%.To manage the inflationary shock,countries would potentially need to raise interest rates and institute monetary tighteni

161、ng.This in turn might affect borrowing costs for individuals,corporations and countries.This model shows that the greater the geoeconomic fragmentation,the higher the associated impact on financial system participants.The above estimates describe the potential marginal impact on GDP growth and infla

162、tion(i.e.by how much growth and inflation deviate from baseline projections).By evaluating different scenarios,from low fragmentation to very high fragmentation,the model highlights that greater reliance on restrictive economic statecraft policies can lead to a larger decline in global GDP.Model det

163、ailsBOX 2The analysis employs a multi-country,multisector model that is widely cited and used in academic research.Geoeconomic fragmentations economic impact is measured using direct and indirect shocks.Direct shocks refer to trade tariffs,whereas indirect shocks encompass negative productivity chan

164、ges,a possible consequence of more financial friction.Economic impacts are measured at one year and five years after fragmentation begins(i.e.short and long term)and reflect annualized changes in economic output.This five-year period is chosen because academic research has found that most of the tra

165、de adjustments to shocks are completed by year five,and trade elasticity estimates are much more accurate at five years than at 10 years.31 The model observes an import price shock in the short run affecting inflation.A tariff,or financial friction that reduces productivity,can be inflationary by ra

166、ising the prices of certain imported and domestically produced goods.However,reallocation of production across countries can offset the potential one-time inflationary effect.For example,reallocation of supply chains and financial flows between countries may reduce or inverse an inflationary impact

167、in a particular country if producers are able to substitute away from that countrys domestic producers.The model includes 40 countries,with the remaining financial and production linkages aggregated into a composite“rest of the world”category.Each country is represented by 30 industries,which allows

168、 for a nuanced analysis of overall economic output based on individual changes in geoeconomic dynamics.The model considers four scenarios of increasing severity to show how different levels of fragmentation will affect the global financial system and economy.As fragmentation increases across scenari

169、os,the probability of that scenario occurring decreases.For analysis purposes only,the model The emergence of economic blocs could shift financial flows,making them more regionally concentrated rather than globally integrated.Navigating Global Financial System Fragmentation17FIGURE 7Short-run impact

170、 of financial fragmentation on gross domestic product across geopolitical blocs-0.6%-1.4%0.0%-0.6%0%-2%-4%-6%-8%-10%-12%Scenario 1Low fragmentationMarginal change in GDP growth(deviation from baseline in%)Scenario 3High fragmentationScenario 2Moderate fragmentationScenario 4Very high fragmentation-1

171、.8%-3.9%-3.5%-10.5%-5.5%-3.2%-2.8%-2.3%-2.8%-4.6%-4.5%-3.6%Similar GDP decrease astheGreat Recessions impactonthe US in 2009 Over 2x larger GDP decrease than the global impact of the COVID-19 pandemic in 2020NeutralsEastWorldWestSource:NERA analysis based on the multi-country,multisector model of Ba

172、qaee&Farhi(2024).32 Data from 2013 World InputOutput Database and Asian Development Banks 2023 InputOutput Tables.Short-run impact is defined as the impact measured one year after the shocks and is based on applying the one-year to 10-year trade elasticity ratio found in Boehm et al.(2023)33 to the

173、elasticities in Baqaee&Farhi(2024),as in Bolhuis et al.(2023)34assumes that three distinct economic blocs emerge based on todays geopolitical environment:the“West”(the US,the EU,Australia,Canada,Japan,South Korea and the United Kingdom),the“East”(China and Russia)and“Neutrals”(Brazil,India,Indonesia

174、,Mexico,Taiwan,Trkiye and a composite of additional remaining countries).Scenario 1 Low fragmentation:In this scenario,countries restrict capital and trade flows only in certain sensitive areas and encourage unimpeded activity in all other parts of the economy.The model envisions a ban on trading se

175、nsitive technology between the Eastern and Western blocs similar to the“small yard and high fence”approach,which limits investment restrictions to sensitive industries or technologies without impeding capital flows to other parts of the economy.35 The overall impact on global output is notable,but m

176、oderate,at-0.6%after one year.Inflation increases by 0.6%globally.Scenario 2 Moderate fragmentation:This scenario introduces economic statecraft restrictions on all economic exchanges between the three blocs,with less severe measures between Neutrals and the other two blocs.Accordingly,the model sho

177、ws that there are more significant tariff and financial productivity losses,driving a 2.3%decline in global economic growth in the short run.The effect on inflation is also more significant in this scenario,with a projected increase of 2.3%.Navigating Global Financial System Fragmentation18Scenario

178、3 High fragmentation:This scenario forecasts a financial decoupling that ceases all economic exchanges between Eastern and Western blocs.Neutral countries are subject to moderate restrictions on capital and goods flows but maintain their financial linkages and supply chains with both the East and We

179、st.The costs of fragmentation are severe for all three blocs,with global output being reduced by 3.6%in the short run.The Western bloc would see a decrease similar to the impact of the Great Recession on its respective economies.Global inflation is estimated to increase by 3.5%.Scenario 4 Very high

180、fragmentation:The worst-case,and least probable,scenario establishes two distinct economic blocs.All financial and economic activity stops between East and West,and the Neutrals are compelled to choose the side of their largest trading partner.The output losses are highest for Neutrals,who are force

181、d to limited economic exchange to counterparts within a single bloc.In the short run,total global output losses reach 5.5%of global GDP,approximately twice as much as during the COVID-19 pandemic,with global inflation rising by 5.2%.For the Eastern bloc,the impact would be deflationary,as weaker dem

182、and translates to easing price pressures.The long-term impact on output remains significant at 4.2%.FIGURE 8Short-run impact of geoeconomic fragmentation on global inflation0.6%2.3%3.5%5.2%0%1%2%3%4%5%6%Marginal impact on global inflation(deviation from the baseline in%)Scenario 1Low fragmentationSc

183、enario 3High fragmentationScenario 2Moderate fragmentationScenario 4Very high fragmentationSource:NERA analysis based on multi-country,multisector model of Baqaee&Farhi(2024).36 Data from 2013 World InputOutput Database and Asian Development Banks 2023 InputOutput Tables.Short-run impact is defined

184、as theimpactmeasured one year after the shocks and is based on applying the 1-year to 10-year trade elasticity ratio found in Boehm et al.(2023)37 to the elasticities in Baqaee&Farhi(2024),as in Bolhuis et al.(2023)38These four scenarios provide estimates for the macroeconomic impact of geoeconomic

185、fragmentation that may change based on different variables,including the resilience of the global financial system.The model serves as a proxy for the different transmission channels,such as regulatory divergence.The country-specific model forecasts for Brazil,China,India and the US show the adjustm

186、ent to fragmentation over a period of five years.Higher fragmentation provides financial system participants with greater incentives to locate alternative sources of capital or shift to different payment systems to reduce costs in the long term.Navigating Global Financial System Fragmentation19FIGUR

187、E 9Long-run shortfall of GDP relative to IMF forecast Shortfall of GDP relative to IMF forecast United States-2.3%-3.0%-2.0%-1.0%0.0%20252026202720282029-2.2%-2.0%-2.0%-1.8%Shortfall of GDP relative to IMF forecast Brazil20252026202720282029-4.1%-3.9%-3.9%-3.6%-4.3%Shortfall of GDP relative to IMF f

188、orecast India-7.0%-6.0%-5.0%-4.0%-3.0%-2.0%-1.0%0.0%20252026202720282029-6.6%-6.1%-5.4%-5.4%-4.6%Very high fragmentationModerate fragmentationHigh fragmentationLow fragmentationShortfall of GDP relative to IMF forecast China-5.0%-3.0%-4.0%-2.0%-1.0%0.0%20252026202720282029-4.4%-4.0%-4.0%-4.3%-3.7%-5

189、.0%-3.0%-4.0%-2.0%-1.0%0.0%Note:Figure shows the projected shortfall of GDP relative to annual IMF Real GDP growth projections.Source:Based on multi-country multisector model of Baqaee&Farhi(2024).39 Data from 2013 World Input-Output Database and Asian Development Banks 2023 Input-Output Tables and

190、IMF.Each years impact is calculated by applying the ratio of the trade elasticity for the associated number of years since 2024 to the 10-year trade elasticity as found in Boehm et al.(2023)to the elasticities in Baqaee&Farhi(2024)The costs of a fragmented financial system are particularly acute for

191、 EMDEs,where capital flows and costs are more influenced by geopolitical factors,potentially jeopardizing their growth prospects and convergence opportunities.40 Without access to necessary pools of capital and investment,these states may seek financial support outside the international rules-based

192、system,further exacerbating fragmentation.A fragmented financial system could undercut financial stability and hinder coordinated global responses to financial shocks.More fragmentation could mean that EMDEs receive less support during 2.2 Impact on EMDEsNavigating Global Financial System Fragmentat

193、ion20financial crises and encounter greater difficulty achieving sovereign debt relief.41 In an environment with more and fragmentated creditors,individual creditors might engage in bilateral rather than multilateral negotiations with debtor nations,further complicating the resolution process.As geo

194、political tensions escalate,the likelihood of a sudden stop in capital flows increases.42 In a system with diminished liquidity,states without robust and well-integrated capital markets may encounter difficulties in securing funding for essential investments,partly due to reduced access to private c

195、apital.This includes EMDEs as well as developed regions with fragmented capital markets.The EUs lack of integrated capital markets,as recently highlighted in the Draghi Report,represents a significant hurdle for unlocking more economic dynamism in Europe.43Current trends indicate that amid rising ge

196、oeconomic uncertainty,more investors are directing their capital to advanced economies,especially the United States.44 In addition,some governments extraterritorial enforcement of regulations have imposed requirements stricter than local laws,which increases compliance and operating costs for global

197、 financial institutions operating abroad.These heightened costs may compel international banks to withdraw from EMDEs,leading to increased financial intermediation costs and diminished financial inclusion in those regions.Further financial system decoupling would increase the risk of countries and f

198、irms getting caught between economic blocs with conflicting regulations and standards.Fragmentation might also impede multilateral collaboration on challenges where collective action is essential,such as the energy transition and EMDE debt relief.The reports quantitative analysis shows that non-alig

199、ned countries would likely suffer the highest negative costs,as they are forced to choose one bloc as a trading partner and are impeded in accessing advanced technology and research and development.45 Further financial system decoupling would increase the risk of countries and firms getting caught b

200、etween economic blocs with conflicting regulations and standards.Navigating Global Financial System Fragmentation21A more fragmented financial system exposes private financial actors,including banks,hedge funds and institutional investors,to all of the previously mentioned macroeconomic costs and ri

201、sks.Higher inflation and regulatory divergence not only decrease corporate margins,but policy uncertainty also creates pressures for the private sector to focus on shorter-term opportunities and outputs at the expense of more strategic,long-term planning.By threatening many of the key tenets of long

202、-term,prudent investing,including universal respect for property ownership and the ability to invest across borders,fragmentation may necessitate higher returns for investors or reduce cross-border flows.Companies are forced to weigh return and business considerations against changing geopolitical t

203、rends and their associated risks and costs(pliance costs).46 2.3 Impact on financial institutionsBusiness mitigation strategies:Use scenario analysisBy conducting scenario analysis,financial institutions can swiftly respond to ad-hoc changes in the geopolitical landscape and adjust strategies in rea

204、l time.Geoeconomic policies that weaken financial stability or prompt asset reallocations may also reduce the ability of banks and other non-bank financial institutions to facilitate financial intermediation.47 This example underscores how the costs of financial fragmentation,such as reduced bank le

205、nding,can cascade through the economy.Investing in a multipolar worldBOX 3Fragmentation of the global financial system has led to increased tariffs,economic sanctions and export controls complicating deal-making and heightening the risks associated with cross-border investments.In 2023,the Organisat

206、ion for Economic Co-operation and Development(OECD)reported a significant rise in foreign investment regulations,with 80%of the 61 reporting economies implementing screening mechanisms,leading to prolonged transaction timelines and heightened uncertainty.Investment restrictions and varying regulator

207、y criteria across jurisdictions create complexities in assessing strategic sectors as financial outcomes must now be weighed against geopolitical risks.This has prompted a shift towards investments in domestic markets with lower geopolitical sensitivity and reduced global supply-chain entanglements.

208、Investors,such as Temasek,have established policy and governance teams in key global capitals to build a resilient portfolio that balances risk and compelling opportunities.Impact on private financial institutions risk managementCounterparty riskFinancial institutions(FIs)could have fewer options fo

209、r risk-sharing,capital sourcing and transacting,increasing overall counterparty riskCredit riskInvestors and ratings agencies may re-evaluate debt profiles across various jurisdictions and blocs,impacting the credit risk of corporates and governmentsCurrency riskThe rise of competing international r

210、eserve currencies might increase currency instabilityInvestment execution riskRestrictions on capital flows,listings and cross-border asset ownership,as well as the risk of government seizures,forced sales and reduced market discipline,could affect investors ability to execute investment strategies

211、and realize returnsLiquidity and solvency riskTo safeguard against shocks,FIs might hold larger reserves on their books to manage liquidity and solvency risksMarket access risk/opportunity costsEconomic sanctions and/or other measures could prohibit investors and companies from entering certain mark

212、etsRegulatory requirementsGeopolitical volatility could force governments to impose further capital,liquidity or stress-testing requirementsReputational riskFIs and corporates with exposure to non-aligned countries and blocs,or even non-cooperative firms and sectors,could see reputational risks with

213、 the public and their governmentsRisk managementFragmentation may incentivize FIs to focus domestically or within aligned blocs,limiting their ability or desire to manage risk through diversificationValuation riskGeopolitical pressure may weaken investor appetite,thereby limiting deal opportunities,

214、reducing liquidity,causing asset-stranding and increasing valuation volatilityThe potential costs and risks for firms of a more fragmented financial futureTABLE 2Source:World Economic Forum and Oliver Wyman Table 2 outlines the key risks and costs of a fragmented global financial system for financia

215、l institutions as well as how they might significantly affect an institutions strategic planning,operational efficiency and overall competitiveness.These challenges necessitate careful consideration and strategic adaptation to navigate the evolving financial landscape.Navigating Global Financial Sys

216、tem Fragmentation23Introduction:As regulatory environments tighten and geopolitical tensions rise,public pension plans and private equity firms are re-evaluating their strategies regarding China-focused funds.US institutions with significant private fund investments in China are facing increasing di

217、fficulties in exiting their investments.48Changing regulatory landscape:US pension plans,with over$4 billion allocated to China-focused private equity,are delaying redemptions as their investments and funds approach the end of their 10-year lifespans.The regulatory environment has shifted dramatical

218、ly,particularly following the delisting of Didi from the New York Stock Exchange in 2022,which has dampened US initial public offerings(IPOs)of Chinese companies.The introduction of US legislation requiring ByteDance to divest its TikTok operations has further complicated exit strategies for US-back

219、ed private funds,raising fears of diminished valuations.Decline in investment activity:Historically,US private equity funds were active in China,investing heavily in its consumer and internet sectors.However,investment from US funds fell by 68%in 2022,with only five Chinese companies backed by US pr

220、ivate equity going public in New York since early 2022,a stark decline from the 18 in 2021,alone.The combination of the Federal Reserves interest rate hikes and new regulatory requirements effectively stalled potential IPOs,leaving investors with limited exit options.Implications for investors:The i

221、nability to exit investments has serious implications for foreign pension plans and private equity firms.As funds approach liquidation timelines,concerns grow over the lack of liquidity and the potential need to extend investment durations.Investors are left with few choices,often resorting to rolli

222、ng over their investments in the hope that the IPO market will eventually reopen.The performance of China-focused funds has also suffered,with benchmarks such as the Warburg Pincus China fund experiencing a significant drop in internal rates of return.The landscape for foreign private equity investm

223、ents in China is increasingly fraught with challenges.Regulatory changes,geopolitical tensions and a stagnant IPO market have created a complex environment for investors.As they navigate these difficulties,many financial actors are left with little choice but to extend their investment horizons whil

224、e hoping for a more favourable exit climate in the future.Introduction:Foreign exchange(FX)settlement risk captures the risk that one party delivers the currency it sold but does not receive the currency it bought,resulting in a loss of principal.In order to mitigate FX settlement risk on a global s

225、cale,the private sector established CLS in 2002 as a response to public-sector calls.Today,on average,more than$7.2 trillion in 18 of the most actively traded currencies flows through CLS each day.CLS mitigates FX settlement risk by synchronizing the settlement of payment instructions for the two cu

226、rrency legs of an FX trade.It does this by providing payment-versus-payment(PvP)functionality in which a partys payment instruction in one currency is not settled unless the corresponding payment instruction in the counter currency is settled.PvPs importance is widely recognized by public-and privat

227、e-sector initiatives such as the BCBS,which recommends using PvP settlement where practical;the G20 Roadmap for enhancing cross-border payments,which inter alia aims to facilitate increased adoption of PvP;and the FX Global Code.Growth of emerging market currencies comes with growth of FX settlement

228、 risk:According to the 2022 BIS Triennial Survey,the FX market turnover has multiplied by a factor of five over the past decades,from around$1.5 trillion to approximately$7.5 trillion per day.Throughout its evolution,several key currencies have comprised the bulk of FX trading,dominated by the US do

229、llar,which facilitated offshore funding markets and serves as a base currency through which other currencies are exchanged indirectly.The Chinese renminbis share of the FX market has grown from 1%20 years ago to 7%today,making it the fifth most actively traded currency.Overall,the growth in EM curre

230、ncy trading creates opportunities,but also increases challenges regarding higher systemic risk exposure,less efficient capital allocation and higher settlement risks for market participants.The BIS Triennial Survey found that the non-PvP share in overall FX turnover is approximately 22%,largely attr

231、ibuted to EM currencies.Solutions are needed to further mitigate FX settlement risk:According to the BIS Triennial Survey,the average daily turnover of non-CLS-eligible currencies more than tripled from$0.2 trillion in 2010 to$0.7 trillion in 2022,while the share grew from 5.5%of trades to 8.5%.Addi

232、ng new currencies to CLSs settlement service is a complex endeavour,requiring ongoing support from central banks on both sides of the currency flow,and crucial legal,risk and liquidity standards must be met in the jurisdiction of onboarding.Beyond PvP,CLS is exploring the possibility that EM currenc

233、ies can benefits further from CLSNet,an automated bilateral payment netting calculation service across 120 currencies.CASE STUDY 1Geoeconomic tensions impede investment exit strategiesCASE STUDY 2Growth of emerging market currenciesNavigating Global Financial System Fragmentation243Implementing safe

234、guards can help protect the financial systems integrity and avoid more severe consequences of excessive fragmentation without undermining state sovereignty;this report proposes two sets of safeguarding frameworks.The first framework,the Principles to Safeguard the Global Financial System from Fragme

235、ntation,establishes the core conditions necessary for maintaining essential financial systems operations and market confidence.The second,the Rules of Engagement for Responsible Economic Statecraft,lays out parameters for policy-makers and public-sector institutions to implement geoeconomic policies

236、 while still ensuring the stable operation of the global financial system.Guardrails to protect the global financial systemThe principles and rules of engagement laid out in this report establish a framework under which the global financial system can continue to contribute to prosperity while respe

237、cting national sovereignty.The following are the core principles on which financial services actors rely to conduct business across jurisdictions;violating them would represent a threat to the integrity of the global financial system.1.Clearly define and uphold the rule of law to ensure impartial en

238、forcement and predictability across the financial system The rule of law is the fundamental building block that supports the functioning of the global financial system.A sound legal system,legislative consistency,independent courts and regulatory autonomy are essential parts of a stable legal infras

239、tructure that facilitates trust and predictability among financial market participants.49 The historical relationship between strong legal frameworks and the US dollars central role in global finance demonstrates that predictable rule enforcement underpins financial system stability.2.Respect financ

240、ial and physical property ownership rights to maintain trust and encourage investment,thereby fostering financial stability Private property rights align creditors and debtors incentives to keep the global financial system functioning smoothly.A governments commitment to upholding these rights ensur

241、es that,when necessary,property seizures follow rigorous and transparent protocols and that such seizures represent exceptions to the orderly conduct of markets.Precise definitions and articulations about the cause of such seizures can signal that governments respect property rights and resort to se

242、izure based on clear,transparent processes only.Such a foundation gives investors the confidence to accurately value assets,hold property across borders and operate consistently across the globe.3.Avoid unilaterally expropriating sovereign assets even during times of heightened tensions or conflict

243、Sovereign assets,in particular central bank reserves,help countries“protect against economic shocks”and support the stability of the global financial system.50 Where possible,policy-makers should consider exempting such reserves from permanent seizure or expropriation via unilateral economic statecr

244、aft to better protect the systems integrity.Affirming a commitment to protect such assets helps policy-makers establish a set of norms and draw red lines that define the boundaries of appropriate conduct for economic policies.3.1 Principles to Safeguard the Global Financial System from Fragmentation

245、 Violating the core principles would represent a threat to the integrity of the global financial system.Navigating Global Financial System Fragmentation254.Safeguard independence and bolster the capabilities of international institutions,such as standard-setting bodies,to preserve their role in glob

246、al financial governance International financial institutions(IFIs)provide many of the linkages holding the global financial system together.Independent global financial governance supported by standard-setting bodies,such as the CPMI,International Organization of Securities Commissions(IOSCO)and FSB

247、,creates a predictable environment that enables financial actors to conduct long-term strategic planning.To maintain public trust,IFIs must demonstrate robust accountability through public consultation processes,detailed disclosure of decision-making procedures,stronger channels for stakeholder feed

248、back and dispute resolution.Such measures help sustain confidence in the neutrality of IFIs,even during periods of geopolitical tension.53 5.Regulate and manage critical financial market infrastructures,but avoid politicizing or severing the underlying financial rails,given that these systems are es

249、sential for maintaining the integrity,functionality and efficiency of the financial system As the engine room of the global financial system,FMIs facilitate payments,settle and clear transactions,and manage securities deposits.Governmental interference in FMIs work can degrade their functionality an

250、d reduce the efficiency of the overall financial system.Legacy FMIs process a large majority of the financial systems“traffic”.The SWIFT interbank messaging system,for instance,handled about 90%of global payment messages in 2020.54 While policy-makers should be empowered to regulate and monitor the

251、activities that occur on financial system payment rails,including imposing sanctions,it is important to recognize that doing so may produce unintended consequences.For instance,policy measures that sever financial system payment rails could make it hard to lower cross-border payment costs in line wi

252、th the G20 Cross-Border Payments Roadmap.Institutional fragmentationBOX 5US and EU responses to Russias attack on Ukraine in 2022 brought questions about control of FMIs to the fore for some nations.After EU regulations disconnected several Russian banks from SWIFT,the use of alternative domestic in

253、frastructures to process payments in Russia intensified.Russias System for Transfer of Financial Messages(SPFS),created in 2014,saw a 400%increase in annual transactions between 2022 and 2023.55 Discussions regarding a digital currency mechanism to enable cross-border payments received widespread at

254、tention at the BRICS Summit in 2024.56 Policy measures that sever financial system payment rails could make it hard to lower cross-border payment costs in line with the G20 Cross-Border Payments RoadmapManaging frozen assetsBOX 4US and European leaders deliberated whether to permanently seize nearly

255、$300 billion in frozen Russian central bank reserves in 2023.The deliberations raised concern among some other nations,including Saudi Arabia,about whether their central bank reserves might be similarly vulnerable.Reporting suggested that one Saudi strategy to insulate its reserves would have involv

256、ed reducing US dollar and euro holdings measures that would have deepened fragmentation.51 Rather than seize the Russian central bank reserves,the G7 leaders opted to collateralize the future interest earnings on the frozen Russian reserves to finance a$50 billion loan to Ukraine.52Managing frozen a

257、ssetsBOX 4US and European leaders deliberated whether to permanently seize nearly$300 billion in frozen Russian central bank reserves in 2023.The deliberations raised concern among some other nations,including Saudi Arabia,about whether their central bank reserves might be similarly vulnerable.Repor

258、ting suggested that one Saudi strategy to insulate its reserves would have involved reducing US dollar and euro holdings measures that would have deepened fragmentation.51 Rather than seize the Russian central bank reserves,the G7 leaders opted to collateralize the future interest earnings on the fr

259、ozen Russian reserves to finance a$50 billion loan to Ukraine.52Navigating Global Financial System Fragmentation266.Ensure that parallel financial market infrastructures are interoperable to facilitate optimal transactions and market efficiency With geopolitical tensions on the rise,proposals such a

260、s a new cross-border digital currency payment mechanism developed by the BRICS countries could signal the beginning of a broader trend among countries“seeking to reduce their dependency on Western payment systems”.57 To prevent the emergence of distinct financial blocs operating on separate payment

261、rails,it is critical that new FMIs are interoperable and also preserve interoperability with new and existing systems.Policy-makers and stakeholders could proactively leverage the existing financial governance systems,develop standardized protocols for data and transaction exchanges,ensure the inter

262、operability of frameworks and implement mechanisms for ongoing monitoring of the infrastructures.The G20s Roadmap for Enhancing Cross-Border Payments represents one ongoing policy effort to ensure such interoperability.7.Structure domestic and multilateral policies and financial regulations to suppo

263、rt financial stability and ensure cross-border flows of capital,data,goods,people and ideas In todays interconnected financial landscape,regulatory and monetary policy decisions typically have ripple effects far beyond the boundaries of any single country.Protecting this interconnected financial lan

264、dscape carries upsides for governments and the private sector alike,including access to a global financial safety net that can enhance resilience against shocks.To safeguard the continuous operation of this system,governments can develop mutual recognition mechanisms that,where possible,align new re

265、gulations and emerging policies with international norms and existing standards.This may help avoid the emergence of an incoherent patchwork of conflicting and overlapping policies worldwide as well as the risk of extraterritorial enforcement.Integrating new technologies,digital assets and fintech i

266、nto the existing regulatory landscape can ensure that the financial system remains adaptive and forward-looking.588.Shield the independence of fiscal and monetary policy to promote financial stability,reduce the risk of competitive interference and increase opportunities for transparent decision-mak

267、ing Divergence between monetary and fiscal policies may result in diminished trust and stability within the financial system.Given concerns that greater fragmentation could drive inflation,nations will need robust monetary policy measures to maintain financial stability.Policy-makers can support the

268、 independence of central banks and foster greater policy cohesion among them.59 This can be achieved through coordination and increased dialogue facilitated by institutions like the BIS.Without such transparency and regularized communication the US Federal Reserves Jackson Hole Economic Symposium an

269、d G20 central bank meetings are examples of existing fora costly miscalculations can increase the risk of escalatory spirals,such as competitive devaluations.Navigating Global Financial System Fragmentation27In the current geopolitical environment,complete regulatory harmonization is unlikely and a

270、certain degree of fragmentation will probably persist.Nevertheless,policy-makers can strive to design geoeconomic statecraft policies that do not result in excessive fragmentation.The following rules of engagement are intended to assist policy-makers in balancing the unintended consequences of geoec

271、onomic statecraft and excessive fragmentation with safeguarding national security and sovereignty.1.Design and implement targeted and well-aligned statecraft measures to minimize the risk of unintended consequences and reduce the private sectors administrative burden(e.g.carry out cost-benefit analy

272、ses,provide clear implementation guidance,and assess and reinforce existing regimes)Economic statecraft measures designed to disrupt global capital flows or sever payment connections can also have unintended consequences.For example,when the United States sanctioned the Russian firm Rusal in 2018,th

273、en the second largest producer of aluminium in the world,the measures disrupted global aluminium trade,which caused aluminium prices on commodity markets to surge to seven-year highs and impacted downstream consumers.60 This example also shows that financial markets are fundamentally interwoven with

274、 the real economy financial fragmentation inevitably affects all global trade flows,raising costs for market participants and undermining investor confidence.3.2 Rules of Engagement for Responsible Economic StatecraftDesigning targeted economic statecraft measuresFIGURE 10 Identify specific areas in

275、 the financial system and economy Use a“small yard and high fence”strategy to limit impact Coordinate measures on a broad multilateral basis Ensure effective design,implementation and enforcementDefine contextCost-benefit analysisMultilateral alignment Assess the potential financial,geopolitical and

276、 sectoral impacts Anticipate spillovers and evaluate effectivenessSource:Oliver Wyman analysisTo minimize unintended consequences,policy-makers can adopt ex-ante measures,such as:Defining specific areas for imposing restrictions within the real economy and domestic financial markets,such as the US p

277、roposal to adopt a“small yard and high fence”approach Conducting cost-benefit analyses to anticipate possible financial and sectoral spillover effects,evaluating likely effectiveness and implementation feasibility,and determining whether existing statecraft measures can be adapted instead of introdu

278、cing new measures Aligning economic statecraft measures on the broadest possible multilateral basis across design,implementation and enforcement by establishing intergovernmental“statecraft taskforces”to oversee policy design,develop real-time information exchanges and agree on standard implementati

279、on and enforcement protocolsEmerging alignment BOX 6The Committee on Foreign Investment in the United States(CFIUS),which administers the US governments inbound investment screening mechanism,has set up new working groups with the EU and Mexico to better coordinate their respective investment screen

280、ing regimes.Establishing permanent fora to exchange information and best practices can help close enforcement gaps,reduce compliance costs for the private sector and foster investment.The rules of engagement aim to assist policy-makers in balancing the unintended consequences of geoeconomic statecra

281、ft and excessive fragmentation with the safeguarding of national security and sovereignty.Navigating Global Financial System Fragmentation28Constructive carve-outsBOX 7The United Nations developed a model for carve-outs to sanctions by creating a“humanitarian exemption”that authorized humanitarian a

282、gencies to pay sanctioned entities for procuring essential supplies,such as food and medicine.A 2023 UN resolution authorized payments“necessary to ensure the timely delivery of humanitarian assistance”.632.Establish publicprivate consultation mechanisms to promote transparency in decision-making re

283、garding the impact of economic statecraft measures on the financial system Developing publicprivate consultation mechanisms could provide greater transparency,clarity and consistency about economic statecraft measures.Such channels could have three specific goals:Providing clear and exhaustive guida

284、nce to private-sector entities about how to implement statecraft measures,such as identifying the individual and entity whose assets a bank must freeze Establishing a standing feedback cycle between policy-makers and financial institutions to manage questions and challenges,flag inconsistent policy

285、directives and help policy-makers prioritize competing directives61 Creating publicprivate advisory committees for finance ministries and sector-specific working groups to facilitate ongoing exchanges,etc.Business mitigation strategies:Participate in feedback mechanismsActive participation in discus

286、sions with policy-makers can allow financial institutions to highlight potential blind spots and unintended consequences of regulatory actions,promoting more informed decision-making.3.Protect populations,sectors,industries and supply chains for humanitarian purposes through exemptions and carve-out

287、s to avoid collateral damage and ensure their continued access to the global financial system Exemptions and carve-outs can help policy-makers adopt statecraft measures that accomplish political goals while still mitigating harms to the most at-risk populations.Before implementing new statecraft mea

288、sures,policy-makers can identify those sectors,industries and supply chains that would likely be subject to spillovers or private-sector derisking practices.Policy-makers can also create explicit carve-outs for the relevant areas before deploying the statecraft measures.Standardized guidelines could

289、 identify exempt sectors and promote other tools,such as financial assistance,capacity-building and technical support,to shield vulnerable actors in the global financial system.624.Prioritize the use of economic inducements,including trade agreements compliant with international law,and other financ

290、ial instruments that foster mutual gain and cooperation over those designed to cause economic pain Infrastructure finance and other financial instruments can advance political objectives through cooperation and mutual gain,rather than by imposing economic harms.Promoting debt relief,trade,developmen

291、t,technical assistance,grants,aid and publicprivate partnerships are only some of the different ways to offer economic inducements.The US used economic inducements in its United States Marshall Plan,which helped rebuild Western Europe after the Second World War.64 By modelling policy alternatives,go

292、vernments can minimize their use of punitive tools in favour of more cooperative measures.The first step is to determine whether there is a way to achieve or surpass the intended policy objective through inducements rather than a measure that disrupts economic activity.If this is not possible,policy

293、-makers should assess whether and how it might be possible to accompany a disruptive measure with,for example,inducements to protect vulnerable industries.5.Collaborate on areas of geoeconomic consensus,including combating financial crime,terrorist financing and the energy transition,recognizing the

294、 need for collective action to address these global financial challenges Combating financial crime,disrupting terrorist financing and financing the energy transition are global financial challenges that are recognized as requiring collective action.Greater fragmentation of the global financial syste

295、m enhances the Combating financial crime,disrupting terrorist financing and financing the energy transition are global financial challenges that are recognized to require collective actionNavigating Global Financial System Fragmentation29Honing collaboration Coordination in practice BOX 8BOX 9The em

296、bezzlement of funds from Malaysias sovereign wealth fund,1Malaysia Development Berhad,has led to strengthened cross-border cooperation among financial regulators from Malaysia,Singapore the US and other countries to combat money laundering more effectively in the future.66 In November 2023,a ransomw

297、are attack on a major Chinese bank“disrupted trading in the US$25 trillion Treasury market”.67 The attack demonstrated how existing intergovernmental communication channels could facilitate ad-hoc crisis coordination and mitigation.Chinese and US policy-makers aligned their responses in bilateral ca

298、lls and worked closely with the relevant regulators and affected banks to prevent significant financial spillovers from the ransomware attack.6.Promote global financial stability through heightened coordination among major financial powers via transparent data sharing and inclusive decision-making t

299、o minimize negative spillovers and prevent system fragmentation Transparent data sharing and inclusive decision-making are mechanisms to enhance stability,regardless of geopolitical context.Global financial powers,including the United States,China,the EU and India,can safeguard the financial systems

300、 stability through more effective coordination.G20 ministerial meetings,the IMF and working-level bodies,including the BCBS,represent coordinating institutions that can offset the risk of geoeconomic-driven fragmentation and facilitate multilateral efforts.urgent need for global cooperation.Intergov

301、ernmental international organizations,such as FATF,facilitate such collaboration around financial crimes by“establishing international standards and performing reviews to assess nations compliance with anti-money laundering/combating the financing of terrorism(AML/CFT)procedures”.65 It is vital that

302、 such institutions continue to operate with integrity and autonomy,regardless of geopolitical relationships.7.Reform the global financial system to reflect 21st-century geopolitical and macroeconomic dynamics and provide greater benefits to EMDEs,promoting inclusive economic growth and stability The

303、 global economic landscape is shifting,with Asia driving an increasing share of GDP growth and nine African countries ranking among the worlds 20 fastest-growing economies in 2024.68 While some emerging economies have benefited substantially from the global financial architecture of the past 50 year

304、s,many EMDEs remain disadvantaged by high capital costs and debt burdens,and financial system fragmentation will likely affect them disproportionately.Given these dynamics,adapting the global financial Navigating Global Financial System Fragmentation30Financial integration has been the global econom

305、ys growth engine for the past 75 years.Capital flows facilitate the exchange of goods and services,as well as the dissemination of new technologies,human capital and knowledge.This reports quantitative analysis indicates that a future of fragmentation in the financial sector could erode such positiv

306、e gains,whereas safeguarding interconnection can support global GDP growth.The analysis suggests that the financial sectors role as an engine of global growth will become increasingly important in the years ahead,because it provides an essential framework for collaboration and joint problem-solving,

307、regardless of the geopolitical landscape.Even amid geopolitical tensions or wars,global actors need mechanisms for financial exchange.Financial intermediation is driven by economic incentives,such as diversifying portfolios and hedging risks.As such,it offers a powerful tool for bringing actors toge

308、ther to address shared challenges,such as the energy and digital transitions,ageing populations and infrastructure investment,all of which require collective action.Policy-makers can support this positive vision for the financial system by leveraging cooperation around areas of broad geoeconomic con

309、sensus,such as combating money laundering and terrorist financing.Regularized interactions and shared wins around these themes can create momentum for deeper cooperation in more contentious areas.For example,the FATFs success in fostering trust and transparency among policy-makers to counter financi

310、al crime could serve as a foundation for further initiatives.In instances where multilateral collaboration is not feasible,plurilateral initiatives offer a viable alternative.Such efforts mobilize a group of economies to provide benefits to all financial system actors.Positive economic statecraft me

311、asures can facilitate investment flows and increase regulatory harmonization.Such integration can lead to increased economic growth as businesses gain access to larger markets,consumers benefit from a wider range of goods and services,and cross-border cooperation accelerates innovation.This would al

312、so align broader ambitions of reducing costs for financial actors and increasing the financial systems effectiveness by promoting greater regulatory interoperability.Ultimately,positive economic statecraft can help lay the foundation for sustainable economic development and resilience in the global

313、economy.3.3 A positive vision for the financial systemarchitecture to better serve EMDEs is both ethically prudent and structurally necessary.Key reforms could include expanding EMDEs access to capital,potentially“unlocking$500 billion”annually through reform of the multilateral development banks(MD

314、Bs).69 Other changes might include increasing their representation in global financial institutions and strengthening their domestic financial infrastructure through targeted capacity-building.708.Protect the ability of firms to engage with actors across the geopolitical spectrum by structuring econ

315、omic statecraft measures,standards and regulations on a multilateral basis,whenever possible Given that a certain degree of financial system fragmentation is likely to persist,financial institutions,including those in ascendent powers such as Brazil,Indonesia,Nigeria,Saudi Arabia and Trkiye,will wan

316、t to continue to conduct business with counterparties and in countries across geopolitical blocs.This is true for large multinationals as well as small and medium-sized enterprises that lack the financial and subject matter expertise to navigate these complexities.To prevent a full decoupling of the

317、 global financial system into competing blocs,policy-makers should craft economic statecraft measures on a multilateral basis,building the broadest possible geopolitical coalitions.This will prevent third-party and domestic actors with legitimate business interests across jurisdictions from being un

318、duly forced to sever their economic ties and choose between geopolitical rivals.Policy-makers can revitalize the WTO and strengthen the global economic and financial regulatory landscape,including the G20,BIS,FSB and IOSCO,to safeguard countries“policy space,sovereignty and economic strength”.71 The

319、 financial sector will become increasingly important in the years ahead,serving as an essential bedrock for collaboration and joint problem-solving,regardless of the geopolitical landscape.Navigating Global Financial System Fragmentation314This reports policy recommendations provide a practical guid

320、e for policy-makers to action the principles and rules outlined in the previous section.In the short to medium term,policy-driven geoeconomic fragmentation will likely remain and may increase further.This section outlines concrete actions to ensure that the core principles underpinning the operation

321、s of the financial system remain intact.The interventions and recommendations are organized into three tiers of action,based on the time horizon and fragmentation levels.The first tier contending with existing fragmentation acknowledges that some degree of fragmentation is likely inevitable.Coordina

322、ted management of this process can prevent systemic disruption.The second tier of responses resisting further fragmentation focuses on preventing divisions from becoming permanent fractures and maintaining connections where possible.Finally,the third tier reforming the system recognizes that to achi

323、eve long-term stability the underlying sources of fragmentation need to be addressed through structural changes to the global financial architecture.This graduated approach allows policy-makers to address immediate challenges while working toward more fundamental solutions.Policy recommendations:A f

324、ramework for actionThe recommendations in this section provide practical guidance for policy-makers.Navigating Global Financial System Fragmentation32Policy recommendations to improve global financial governanceTABLE 3Contend with existing fragmentationPolicy recommendations Increasing time required

325、 for implementationPrinciplesAdopt existing best-practice definitions to define guardrails,including the rule of law Clearly define and upholdtheruleoflawRespect financial and physical property ownership rightsAvoid unilaterally expropriating sovereign assetsSafeguard independence andbolster capabil

326、itiesofinternationalinstitutionsRegulate and manage critical financial market infrastructures,but avoid politicizing or severing the underlying railsEnsure parallel financial market infrastructures areinteroperable Structure domestic and multilateralpoliciesand financial regulationstosupportfinancia

327、l stability and cross-border flows Shield the independence of fiscal and monetary policyStrengthen adherence to international standardsUse regular stress-testing to highlight negative externalities of financial fragmentation Develop interoperability frameworksAnchor the guardrails and promote policy

328、 impactEstablish a best-practice toolkit for economic statecraft Encourage mutual recognition of comparable standards and interoperability of regulatory regimesStandardize the regulation of cross-border capital,services,goods and data flowsEnhance domestic capacity in governance,currencies and capit

329、al marketsIncrease representation for EMDEs Depoliticize decision-making at IFIsEnhance EMDEs access to capital Strengthen the global financial safety netIntegrate AI,digital assets and fintech intotheglobal regulatory environmentCounteract distinct economic blocs with new or strengthened patterns o

330、f economic cooperationEstablish greater policy cohesion to coordinatebetween emerging financial blocsDeepen intraregional integration(e.g.EUCapital Markets Union)Resist future fragmentationReform the system 12456783Source:World Economic Forum and Oliver WymanCountries conflicting geoeconomic interes

331、ts and the resulting trust deficit among policy-makers is driving fragmentation of the global financial system.Since these diverging interests are likely to persist for the foreseeable future,this report echoes existing research in its call to mitigate the costs of fragmentation and counteract mistr

332、ust across the financial system.72Anchor the guardrails and promote policy impactBoth the UN and the G20 have in the past helped establish voluntary codes of conduct and norms for addressing challenging governance issues,such as promoting“responsible state behaviour in cyberspace”.73 Similarly,the W

333、orld Economic Forum has a track record of establishing multistakeholder governance and reporting frameworks such as the Stakeholder Capitalism Metrics.These institutions could 4.1 Contend with existing financial fragmentationNavigating Global Financial System Fragmentation33Leverage established financial governance structures to reduce the growing costs of a fragmented financial systemThe G20 can