Navigating Global Financial System Fragmentation 2025

To resist further financial fragmentation in a more multipolar system, it is essential for major powers, financial institutions and the private sector to preserve the cooperative nature of the current financial architecture.80 One option would be for governments to restrict financial flows in certain sensitive areas only and promote unhampered activity in all other parts of the economy – the “small yard and high fence” model.81 However, even in the case of distinct financial blocs forming, there are different potential institutional and private-sector channels that can build connective tissue between blocs to stop them from drifting farther apart. Counteract distinct economic blocs with new or strengthened patterns of economic cooperation82 While this report stresses the benefits of financial integration and further regulatory harmonization, current global policy trends point to increasing fragmentation of the global financial system as policy-makers balance policy objectives with financial system efficiencies. This report’s quantitative analysis suggests that rewiring certain financial flows, global production and trade routes between blocs through connector countries (e.g. Mexico or Viet Nam) that are not aligned with any bloc would create a less costly new status quo. Such a “low fragmentation” scenario is estimated to result in output losses of around 0.5% of global GDP , while a “very high fragmentation” scenario, with all countries forced to join a large economic bloc, albeit unlikely, could reduce global GDP output by more than 5%. To promote financial integration and minimize the burden on legitimate economic activity, policy-makers can protect firms’ ability to conduct business across jurisdictions and the geopolitical spectrum. Establish greater policy cohesion to coordinate between emerging financial blocs83 Digital cross-border payments create an opportunity for the financial sector to facilitate policy cohesion to make global payments more efficient, inclusive and transparent.84 Following Russia’s invasion of Ukraine, many advanced economies and EMDEs explored multi-country cross-border digital currency projects, such as Project mBridge or Project Agorá, but the ventures lack the support of appropriate standards and financial architecture. Policy-makers can leverage standard-setting bodies, including the BCBS, CPMI and IOSCO, to develop “interoperability standards” to safeguard the system’s operation.85 Stakeholders can build on ongoing efforts by the IMF, BIS and SWIFT, which are all developing models to enable digital cross-border payments, to design a new institutional framework. To reduce regulatory friction in the financial system, decision-makers can develop a basic universal framework to flag potential issues before implementing policy proposals. This approach would streamline, depoliticize and increase the efficiency of current international regulatory processes. Deepen intraregional integration To guard against the risks and costs of global financial fragmentation, policy-makers should deepen economic and regulatory cooperation within their respective regions without discriminating against third countries. Harmonization of regulatory frameworks is one example of promoting competition, liquidity and reduced cost of capital. As outlined in the recent Draghi Report, the EU can further integrate financial markets to support investment and economic growth.86 Policy-makers should align monetary, fiscal and structural policies in regional blocs to address key pain points caused by policy-induced fragmentation, including regulatory decoupling and financial instability. Should financial fragmentation deepen, regional blocs can establish mutual support arrangements that may include regional safety nets, currency swaps and fiscal mechanisms, as well as precautionary credit lines from international financial institutions. These measures may be necessary to strengthen the resilience of individual economies and contribute to a more stable global financial system overall.4.2 Resist further system fragmentation Even if distinct financial blocs form, there are different potential institutional and private-sector channels that can build connective tissue between blocs to stop them from drifting farther apart.