A new report examines how fragmentation in global financial regulation puts competition, economic growth and financial system resilience at risk.
The paper, published by the Bank Policy Institute, Global Financial Markets Association (GFMA), and the Institute of International Finance, says fragmentation in financial regulation costs the global economy about $780 billion each year. Further, it cites the World Economic Forum in estimating that fragmentation could reduce global output by as much as $5.7 trillion annually, depending on the degree of fragmentation.
“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 paper states.
The report also made 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.