Policy Resource

GFMA, BPI and IIF Publish Report on the Costs of Fragmentation and Possible Solutions

Fragmentation in global financial regulation puts competition, economic growth and financial system resilience at risk, says a joint paper published by GFMA, the Bank Policy Institute (BPI), and the Institute of International Finance (IIF).

“Fragmentation resulting from miscalibration of global standards or excessive regulatory and supervisory divergence can trap capital, liquidity and risk in local markets; create significant financial and operational inefficiencies resulting in additional unnecessary costs to end-users; reduce the capacity of financial firms to serve both domestic and international customers; and may increase fragility, making markets more brittle and less resilient,” the trades wrote in the paper.

A 2018 OECD survey estimated that a piecemeal approach to financial sector regulation costs the global economy about $780 billion each year. The World Economic Forum estimates that fragmentation could reduce global output by as much as $5.7 trillion annually, depending on the degree of fragmentation. That’s equivalent to 5% of world GDP and twice the losses seen during the COVID-19 pandemic.

Global standard-setters, including the Financial Stability Board, International Organization of Securities Commissions and others, initiated a review in 2018 to identify ways to address market fragmentation. Yet despite these efforts, fragmentation continues to increase.

Four recommendations to address fragmentation:

1. Identify policies that force subsidiarization. The International Monetary Fund, FSB and Basel Committee on Banking Supervision should identify national rules that require financial institutions to establish local subsidiaries or restrict branch operations.
2. Reassess ring-fencing requirements. Jurisdictions with ring-fencing requirements should review whether those rules are properly calibrated considering the post-crisis resolution framework, including resolution planning and enhanced loss absorbency requirements.
3. Improve global coordination and cooperation. Global standard-setters and regulators should work with industry and among themselves to address fragmentation and risks introduced by inconsistencies.
4. Re-evaluate supervisory colleges and case management groups. The FSB should re-evaluate the functioning of international colleges and case management groups. These groups are supposed to bring together regulators from different countries to oversee global financial institutions, and it would be useful to examine these initiatives and whether they are meeting this goal effectively.

The paper is available here.

– July 2025 –

 

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