Washington, D.C. — Fragmentation in global financial regulation puts competition, economic growth and financial system resilience at risk, says a joint paper published today by the Bank Policy Institute, GFMA and the Institute of International Finance.

“Fragmentation resulting from miscalibration of global standards or excessive regulatory and supervisory divergence can trap capital, liquidity and risk in local markets; create significant financial and operational inefficiencies resulting in additional unnecessary costs to end-users; reduce the capacity of financial firms to serve both domestic and international customers; and may increase fragility, making markets more brittle and less resilient,” the trades wrote in the paper.

A 2018 OECD survey estimated that a piecemeal approach to financial sector regulation costs the global economy about $780 billion each year. The World Economic Forum estimates that fragmentation could reduce global output by as much as $5.7 trillion annually, depending on the degree of fragmentation. That’s equivalent to 5% of world GDP and twice the losses seen during the COVID-19 pandemic.

Global standard-setters, including the Financial Stability Board, International Organization of Securities Commissions and others, initiated a review in 2018 to identify ways to address market fragmentation. Yet despite these efforts, fragmentation continues to increase.

Four recommendations to address fragmentation:

1. Identify policies that force subsidiarization. The International Monetary Fund, FSB and Basel Committee on Banking Supervision should identify national rules that require financial institutions to establish local subsidiaries or restrict branch operations.
2. Reassess ring-fencing requirements. Jurisdictions with ring-fencing requirements should review whether those rules are properly calibrated considering the post-crisis resolution framework, including resolution planning and enhanced loss absorbency requirements.
3. Improve global coordination and cooperation. Global standard-setters and regulators should work with industry and among themselves to address fragmentation and risks introduced by inconsistencies.
4. Re-evaluate supervisory colleges and case management groups. The FSB should re-evaluate the functioning of international colleges and case management groups. These groups are supposed to bring together regulators from different countries to oversee global financial institutions, and it would be useful to examine these initiatives and whether they are meeting this goal effectively.

To access a copy of the paper, please click here.

About Bank Policy Institute

The Bank Policy Institute is a nonpartisan public policy, research and advocacy group that represents universal banks, regional banks and the major foreign banks doing business in the United States. The Institute produces academic research and analysis on regulatory and monetary policy topics, analyzes and comments on proposed regulations, and represents the financial services industry with respect to cybersecurity, fraud, and other information security issues.

About Global Financial Markets Association (GFMA)

The GFMA represents the common interests of the world’s leading financial and capital market participants, to provide a collective voice on matters that support global capital markets. We advocate on policies to address risks that have no borders, regional market developments that impact global capital markets, and policies that promote efficient cross-border capital flows, benefiting broader global economic growth. The Global Financial Markets Association (“GFMA”) brings together three of the world’s leading financial trade associations to address the increasingly important global regulatory agenda and to promote coordinated advocacy efforts. The Association for Financial Markets in Europe (“AFME”) in London, Brussels and Frankfurt, the Asia Securities Industry & Financial Markets Association (“ASIFMA”) in Hong Kong and Singapore, and the Securities Industry and Financial Markets Association (“SIFMA”) in New York and Washington are, respectively, the European, Asian and North American members of GFMA.

About the Institute of International Finance (IIF)

The Institute of International Finance (IIF) is the global association of the financial industry, with about 400 members from more than 60 countries. The IIF provides its members with innovative research, unparalleled global advocacy, and access to leading industry events that leverage its influential network. Its mission is to support the financial industry in the prudent management of risks; to develop sound industry practices; and to advocate for regulatory, financial and economic policies that are in the broad interests of its members and foster global financial stability and sustainable economic growth. IIF members include commercial and investment banks, asset managers, insurance companies, professional services firms, exchanges, sovereign wealth funds, hedge funds, central banks and development banks.  To learn more about IIF, please visit www.iif.com, follow us on Twitter, LinkedIn or YouTube, or check out IIF’s podcasts.