Navigating Global Financial System Fragmentation 2025

A more fragmented financial system exposes private financial actors, including banks, hedge funds and institutional investors, to all of the previously mentioned macroeconomic costs and risks. 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-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 trends and their associated risks and costs (e.g. compliance costs) .46 2.3 Impact on financial institutions Business mitigation strategies: Use scenario analysis By conducting scenario analysis, financial institutions can swiftly respond to ad-hoc changes in the geopolitical landscape and adjust strategies in real 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 lending, can cascade through the economy. Investing in a multipolar world BOX 3 Fragmentation 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 Organisation 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 regulatory 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. 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.