Executive summary An integrated global financial system supports livelihoods and underpins economic growth. This report proposes eight principles to protect the system’s integrity and rules of engagement to put them into practice. Financial integration powers economic growth and makes capital available to entrepreneurs, corporations, governments and citizens. The global financial system connects institutions, regulators and technologies to facilitate capital exchange across borders. Its interconnections have supported recent decades of economic growth and human development. In the quarter- century between 1990 and 2015, more than 1 billion people worldwide were lifted out of poverty.1 To continue this growth path, a well- functioning and integrated financial system that mutually benefits all countries is necessary. The current trajectory of the global financial system, however, suggests that the 21st century may see a more fragmented financial architecture. Russia’s 2022 invasion of Ukraine, and the corresponding responses from Western governments to restrict Russia’s access to the global financial system, represented an inflection point that accelerated fragmentation. Market participants are increasingly basing decisions not just on return-maximization but also on geoeconomic considerations, triggering a shift away from the previous globalized model. To advance domestic economic priorities and national security imperatives, policy-makers must often accept trade-offs that cause fragmentation and might, for instance, reduce the efficiency of international finance – a certain degree of fragmentation is likely necessary to achieve desired policy outcomes. At the same time, financial regulators recognize the benefits of financial integration and minimizing the burdens placed on legitimate economic activity. For several decades, improvements in technology, innovation and governance have made it possible to increase efficiency while reducing regulatory friction. In recent years, however, regulatory friction has increased in tandem with growing geopolitical tensions, leading to what many observers describe as excessive fragmentation. Fault lines are emerging within the global financial system, with cracks beginning to show across both regions and levels of economic development. Despite the international order and financial system becoming more multipolar, analysis suggests that a globalized system is likely to persist in the near term. As more governments prioritize the use of economic statecraft (i.e. the economic tools and policies a state uses to achieve foreign policy and domestic objectives), however, there is a risk of further financial system fragmentation. Business mitigation strategies: Consider broader risk analysis Incorporating geoeconomic factors into their non-financial risk assessments allows financial institutions to identify and assess a broader range of risks, enhancing their overall risk management framework. Navigating Global Financial System Fragmentation 4

Navigating Global Financial System Fragmentation 2025