Navigating Global Financial System Fragmentation 2025

Economic statecraft Economic statecraft refers to the use of economic tools and policies by a state to achieve its foreign policy objectives and enhance domestic resiliency. Coercive statecraft includes sanctions and measures to pressure countries that violate international norms or threaten a government’s geopolitical or economic interests. Positive statecraft includes inducements, such as trade agreements aimed at improving relationships and fostering cooperation. By leveraging these economic instruments, often bundled into industrial policy, states aim to influence other countries’ behaviour while also strengthening their domestic economies. Financial market infrastructures (FMIs)Financial market infrastructures (FMIs) are essential components of the global financial system and provide the foundational framework for the efficient operation of financial markets. They include payment systems, central securities depositories, securities settlement systems, central counterparties and trade repositories, all of which facilitate the processing, settlement and safeguarding of financial transactions.98 Geoeconomic fragmentationGeoeconomic fragmentation refers to the division of the global economy into distinct, often competing economic blocs or spheres of influence, driven by geopolitical tensions and national interests. Investment restrictions, financial sanctions and prioritization of domestic industries over international cooperation are hallmarks of such fragmentation. Countries’ increasing focus on their economic interests can jeopardize the seamless flow of goods, services and capital, which leads to inefficiencies and a more fragmented global economic landscape. Geopolitical fragmentationGeopolitical fragmentation describes the breakdown of international relations and alliances, resulting in a more divided global political landscape. Rising nationalism, the emergence of rival power blocs and the erosion of multilateral institutions characterize such trends, which can exacerbate tensions, conflicts and a lack of cooperation on global issues. As nations prioritize their sovereignty and strategic interests, the ability to address shared challenges collectively diminishes. Global financial safety netThe global financial safety net (GFSN) is a multilayered framework that provides financial stability and support to countries facing economic distress. It comprises four key components: central banks’ foreign exchange (FX) reserves, bilateral swap lines (BSLs), regional financing arrangements (RFAs) and the International Monetary Fund (IMF). The GFSN ensures that countries have access to necessary liquidity and support, particularly in times of geoeconomic fragmentation, which can affect both the demand and supply of these resources. Global financial systemThe global financial system refers to the interconnected network of financial institutions, markets and instruments that facilitate the flow of capital within and across borders. Its actors include central banks, commercial banks, investment firms and regulatory bodies, which work together to allocate resources, manage risks and provide liquidity. It is complex and diverse and includes a wide array of financial products, services and agreements, both formal and informal, which collectively facilitate the movement of financial capital for investment and trade. Its effective functioning promotes economic growth, stability and integration among nations by moving funds necessary for development and commerce. The global system depends on the substrate of domestic financial markets, local banks, stock exchanges, bond markets and other financial institutions that mobilize domestic savings, provide credit and facilitate investments within individual countries. Global financial system fragmentationGlobal financial system fragmentation refers to the increasing disintegration of the interconnected global financial landscape into distinct blocs. Fragmentation arises from geopolitical tensions, regulatory divergence and the emergence of regional financial systems that operate independently of one another. As countries prioritize national interests and security concerns, the seamless flow of capital, investment and financial services is disrupted, leading to a more fragmented environment. International financial institutions (IFIs)International financial institutions (IFIs) are multilateral organizations established by countries to provide financial support, technical assistance and policy advice to foster economic development and stability. These institutions facilitate access to capital, promote sustainable development and address financial crises. Examples include the International Monetary Fund (IMF), the World Bank Group and regional development banks such as the Asian Development Bank (ADB) and the African Development Bank (AfDB). IFIs work collaboratively with member countries to enhance economic resilience, reduce poverty and promote inclusive growth through targeted financial interventions and capacity-building initiatives. Rule of law The rule of law is a political ideal that all individuals and institutions are held equally accountable to evenly enforced laws. The rule of law frequently means different things in different jurisdictions, but universally, it protects fundamental rights, including the security of persons and property. It maintains order, promotes justice and fosters trust in legal and governmental systems.Appendix: Key terminology Navigating Global Financial System Fragmentation 38