Navigating Global Financial System Fragmentation 2025

The potential risks of financial fragmentation make a strong case for policy-makers and financial actors to choose a different path – of reinforcing the global financial system by enhancing regulatory cooperation and further standardizing frameworks for financial transactions. By integrating emerging technologies such as blockchain and artificial intelligence (AI), countries may help improve transparency and efficiency in cross-border payments. Multistakeholder cooperation can strengthen financial governance and help mitigate systemic risks, ensuring that financial markets operate fairly and effectively. This approach promotes stability and resilience in the global economy, promoting trust among stakeholders. The costs of financial system fragmentation As nations have increasingly sought to protect their financial systems from external threats, new challenges have arisen, prompting regulatory and institutional shifts designed to enhance resilience, support domestic industry and insulate supply chains from external shocks. For example, following the COVID-19 pandemic, many nations invested in “friend-shoring” to reorient supply chains in ways that afforded them greater protection over critical infrastructure. Such regulatory and institutional efforts can insulate certain sectors but also increase the complexity of the corresponding financial infrastructure and uncertainty for investors, thereby reducing liquidity, which can cause numerous unintended consequences and knock-on effects. This report represents a concerted effort among global financial actors to assess these impacts, mitigate the negative consequences of fragmentation and propose foundational principles that can strengthen the financial system even amid geopolitical reconfigurations. Financial system fragmentation can have a negative impact by decreasing global economic output and increasing inflation. This report presents new analysis indicating that one-year economic output losses from fragmentation could range from $0.6 trillion to $5.7 trillion, or about 5% of current global gross domestic product (GDP) and twice the output losses caused by the COVID-19 pandemic, depending on the degree of fragmentation. Similarly, inflation rises steadily in most countries as fragmentation increases, which is likely to necessitate higher interest rates and have an impact on borrowing costs for individuals, businesses and governments. Another consideration is that fragmentation’s negative effects will not be distributed equally around the world. Instead, countries or regions that lack sufficiently deep or integrated capital markets will be affected more significantly. According to the report’s analysis, emerging markets and developing economies (EMDEs), not including China or Russia, could see GDP losses of nearly 11%. These changes may force smaller EMDEs to seek alternative sources of funding outside the traditional international system, further exacerbating fragmentation. This fragmented environment could complicate sovereign debt-relief efforts and erase previous progress in this area as creditors pursue separate bilateral negotiations with debtors. Geopolitics also affects private-sector decision-making by increasing policy uncertainty and making long- term strategic planning more challenging. Research suggests that businesses could see impacts on corporate credit, as rating agencies re-evaluate debt profiles across various jurisdictions and blocs. Other impacts include limited market access, as economic sanctions and other measures prohibit investors and companies from entering certain markets. Finally, asset valuations could be impacted, as weakened investor appetite limits deal opportunities, reduces liquidity and contributes to asset-stranding – all of which increase valuation volatility. Alternatively, private sector-led collaboration could offset geopolitical friction and financial fragmentation by linking actors across rival blocs. Financial intermediation tends to occur despite geopolitical tensions or even wars. As such, it offers a powerful tool for bringing actors together to address shared challenges, such as the energy and digital transitions, ageing populations and infrastructure investment, all of which require collective action. The guardrails outlined in this report are designed to protect the ability of the financial sector to fulfil its fundamental role of intermediating global savings and channelling them to promote investment and economic growth, regardless of the geopolitical backdrop. Guardrails to protect the integrity of the global financial system In a recent speech, International Monetary Fund First Deputy Managing Director, Gita Gopinath, called on countries to “build resilience”, but warned that “in the absence of sufficient guardrails, we could end up with severe fragmentation of the global economy and consequently lower productivity and income levels for everyone”.2 This report proposes specific guidelines to protect the system’s integrity at a moment of increasing geopolitical complexity.3 The use of the term “guardrail” does not suggest limits on national sovereignty. Instead, this report’s guidelines, informed and articulated by private-sector leaders from across global financial services, provide a framework to guide future economic statecraft in ways that safeguard the global financial system and facilitate ongoing integration, even in the face of geopolitical tensions. $5.7 trillion Potential lost GDP as a result of fragmentation. Navigating Global Financial System Fragmentation 5