Fragmentation in Global Financial Regulation: A Call for Cohesion
The Commercial Real Estate Finance Council (CREFC) recently spotlighted a pressing issue in global finance: the fragmentation of financial regulations. In a joint paper published on July 9, 2023, the Bank Policy Institute, the Global Financial Markets Association, and the Institute of International Finance highlighted the potential dangers posed by a piecemeal approach to financial regulations, which could undermine competition, economic growth, and the resilience of the financial system.
Understanding Financial Fragmentation
What is Financial Fragmentation?
Financial fragmentation occurs when disparate regulatory standards lead to inconsistencies across borders. The paper, titled The Costs of Fragmentation and Possible Solutions, elaborates on how this growing phenomenon can impede the progress made since the Great Financial Crisis. The Financial Stability Board (FSB) initiated an effort in 2018 to tackle the risks associated with fragmentation, yet the challenges persist.
Key Insights from the Paper
- Undermined Progress: Fragmentation risks reversing gains in the global financial system’s resilience.
- Negative Impact on Growth: It can stifle economic growth and erode competitiveness.
- Regulatory Arbitrage: Increased fragmentation leads to regulatory loopholes that create uneven playing fields among banks.
- Shifting Risk: There’s a risk that volatility may migrate towards less regulated sectors, amplifying systemic issues.
Economic Costs of Fragmentation
CREFC referred to a 2018 OECD survey, which estimated that fragmented financial regulations cost the global economy approximately $780 billion annually. Furthermore, a 2025 World Economic Forum report highlighted that fragmentation could result in economic output losses ranging from $0.6 trillion to $5.7 trillion, equating to about 5% of current GDP.
Recommendations to Combat Fragmentation
To mitigate the risks associated with financial fragmentation, the joint paper presents four crucial recommendations:
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Identify National Rules: The International Monetary Fund (IMF), FSB, and Basel Committee should pinpoint regulations that necessitate financial institutions to form local subsidiaries or limit branch operations.
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Review Ring-Fencing Requirements: Jurisdictions should evaluate ring-fencing rules to ensure they are appropriately calibrated.
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Collaborative Efforts: Global regulators and industry stakeholders must join forces to address fragmentation and the risks that arise from inconsistencies.
- Re-evaluation of International Structures: The FSB should reassess how international colleges and case management groups function.
U.S. Policy Landscape and Global Coordination
Despite these recommendations, CREFC observed a shift in the U.S. administration’s stance on international coordination. Key figures such as Treasury Secretary Scott Bessent, Federal Reserve Chair Jerome Powell, and Fed Vice-Chair of Supervision Michelle Bowman have shown less enthusiasm for aligning with international standards than their predecessors.
A Shift in Perspective
During an April address to the American Bankers Association, Bessent articulated a preference for domestic regulatory analysis over outsourcing decision-making to international bodies, stating, “We should not outsource decision making for the United States to international bodies.”
CREFC’s Ongoing Vigilance
CREFC remains vigilant concerning developments in bank capital requirements, particularly as they pertain to commercial real estate (CRE) financing. The council is prepared to address relevant notices of proposed rule-making as they arise, ensuring that the needs of the market are adequately represented.
Conclusion
As the financial landscape continues to evolve, the need for cohesive regulations is more critical than ever. Stakeholders must work collaboratively to mitigate fragmentation’s negative effects, safeguarding economic stability and enhancing the resilience of the global financial system.
For further insights on financial regulation and its implications, visit the CREFC website or delve into the Global Financial Markets Association resources.
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