Global Banking In A Deglobalising World: Why Policy Coordination Is Key To Economic Stability

In recent years, the global economy has seen a marked shift towards deglobalisation, with countries becoming more inward-looking and trade patterns becoming more fragmented. This trend, exacerbated by geopolitical tensions, trade wars, and the pandemic, poses significant challenges to the global banking sector, which plays a pivotal role in facilitating cross-border trade and finance. Banks are essential to keeping global trade flowing, providing critical services such as financing, foreign exchange, and risk management. However, fragmented banking regulations across the world threaten to disrupt this system, potentially deepening the impact of deglobalisation and harming the global economy. Policy coordination is essential to prevent regulatory fragmentation from further exacerbating economic instability.

The Role of Banks in a Globalised Economy

For decades, banks have acted as the financial lubricant that keeps the global economy functioning smoothly. They provide essential services such as trade financing, cross-border payment systems, currency exchange, and global investment management. Banks ensure that businesses can operate efficiently across borders by supporting international supply chains, enabling foreign investments, and facilitating international trade deals.

As trade has become more globalised over the last 80 years, banks have adapted to the needs of their customers by expanding their services to support these interconnected markets. Although the products and services offered by banks have evolved, their fundamental role in the global economy remains unchanged: to support the flow of capital and goods across the world.

The Risks of Fragmented Rulemaking

A significant risk to the global banking system today comes from fragmented rulemaking. Countries are increasingly adopting divergent regulatory frameworks for their banking sectors, reflecting local political and economic considerations. These differences manifest in areas such as capital requirements, cross-border transaction regulations, anti-money laundering (AML) standards, and data privacy laws. When countries fail to coordinate their banking regulations, it leads to inefficiencies, increased costs, and operational difficulties for banks operating in multiple jurisdictions.

For example, differing capital requirements can place a heavy burden on international banks, forcing them to comply with conflicting rules that add to operational complexity. Similarly, variations in AML regulations make it harder for banks to implement consistent compliance measures, increasing the risk of regulatory breaches. When banks face this kind of regulatory uncertainty, they may become less willing to engage in cross-border activities, reducing the availability of financial services that are crucial to global trade and investment.

Why Policy Coordination is Essential

To mitigate these risks, policy coordination is critical. Harmonising banking regulations across borders would ensure that global financial systems remain efficient and robust, even in the face of deglobalisation trends. Consistent regulatory frameworks would reduce friction for banks conducting cross-border transactions, simplify compliance, and lower costs for both banks and their customers.

One of the key benefits of coordinated policy is its ability to prevent economic fragmentation. As economies become more insular, the risks of economic isolation grow, which could further damage global trade networks. Coordinated banking regulations can act as a counterbalance, keeping international financial flows smooth and stable. For instance, institutions like the Basel Committee on Banking Supervision work to promote consistent regulatory standards globally. By adhering to international frameworks such as Basel III, countries can ensure that their banking systems remain interconnected, minimizing the disruptive effects of deglobalisation.

Examples of Effective Policy Coordination

There are successful examples of policy coordination that show the positive effects of global regulatory harmonisation. International frameworks such as Basel III have been instrumental in standardising capital requirements and risk management practices for banks worldwide. These regulations were implemented in response to the 2008 financial crisis, aiming to strengthen the global banking system and prevent future crises. The coordinated adoption of Basel III by countries worldwide helped stabilise financial markets and restore trust in the global banking system after the crisis.

On the other hand, there are also case studies of regulatory fragmentation that illustrate the risks of uncoordinated rulemaking. For example, after the 2008 financial crisis, some countries implemented their own stricter regulations without aligning with global standards. This led to operational inefficiencies for multinational banks, as they had to comply with varying rules in different jurisdictions, slowing down cross-border transactions and creating market confusion.

Challenges to Achieving Policy Coordination

While the benefits of policy coordination are clear, achieving it is not without challenges. One of the main obstacles is the tension between national sovereignty and the need for global consistency. Countries have different economic interests, political landscapes, and regulatory priorities, which makes international cooperation difficult. For instance, some countries may prioritise financial stability and impose higher capital requirements, while others focus on promoting economic growth through more relaxed regulations. These diverging priorities make it difficult to achieve uniform standards.

Additionally, balancing global standards with local regulations is a delicate process. While international frameworks can provide a common baseline, local regulations must also account for unique economic and political circumstances. Finding a middle ground where global standards are flexible enough to accommodate local needs is essential for successful policy coordination.

The Way Forward: Building a Unified Global Banking Framework

Moving forward, there are opportunities for policymakers to enhance coordination in global banking regulations. Strengthening the role of international institutions like the Basel Committee, the Financial Stability Board, and the International Monetary Fund can foster dialogue and cooperation among regulators. These bodies can work to update regulatory frameworks to reflect the realities of a deglobalising world, ensuring that financial systems remain integrated and resilient.

Another area of focus is innovation in banking, such as the rise of digital currencies and fintech. As these technologies grow in importance, new regulatory frameworks will be needed to manage their impact on the global economy. A unified approach to regulating digital currencies, for example, could prevent market fragmentation and ensure that these innovations support, rather than disrupt, global financial stability.

Conclusion

In the face of deglobalisation, policy coordination in banking has never been more critical. Banks play an essential role in supporting global trade, and fragmented regulations threaten to undermine their ability to function efficiently. By harmonising banking regulations across borders, policymakers can prevent economic fragmentation, maintain financial stability, and ensure that global trade continues to thrive.

As the world becomes more interconnected and technology reshapes financial systems, it is crucial that policymakers collaborate to build a regulatory framework that can adapt to future challenges. Only by working together can we preserve the stability of the global financial system in a rapidly changing world.

Author: Brett Hurll