How the financial sector can contribute to restoring cooperation in a divided world

Written by Matthew Blake, Director, Center for Financial and Monetary Systems, World Economic Forum

2024 will be a significant year for the global financial and monetary system. Despite political, economic, and geopolitical uncertainties in the United States and elsewhere, the financial sector can play a constructive role on systemically important issues, thereby improving system integrity. and strengthen global cooperation for the benefit of all.

There’s a problem

Politically, the United States is rapidly approaching a highly contentious presidential election with a sharply divided electorate. Disagreements and disagreements on multiple fronts raise the possibility that political instability in the world’s largest economy will have destabilizing effects beyond borders.

The health of the US economy is also uncertain, with interest rate cuts, slightly positive real gross domestic product (GDP) growth, and low unemployment expected in 2024. Confidence in a “soft landing” is growing, but inflation is still likely to rise. It could prove to be more sticky and volatile than expected, leading to more bearish economic outcomes.

Geopolitical tensions are rapidly increasing worldwide. Brexit, relations between China and the US, and wars in Europe and the Middle East are driving wedges between nations and forcing them to recalibrate their economic and military loyalties. These changing dynamics are already evident on the economic front.

According to data from the United Nations Conference on Trade and Development, trade between geopolitically linked countries has increased by more than 6%, while other trade has declined. A recent analysis by the International Monetary Fund suggests that international trade restrictions could reduce global economic output by up to 7% over the long term, and the authors say this is more than enough for the French and German economies. It is said to be equivalent to the combined size of the two.

Despite this very troubling backdrop, financial services can play a pragmatic and constructive role in system-wide concerns, acting as a force for unity rather than friction. Notable areas of cooperation include protecting financial stability, combating criminal actors, climate finance, and strengthening personal economic resilience.

financial stability Protecting financial stability is essential. As witnessed during the global financial crisis and more recently with the Silicon Valley bank failure, a financial institution’s most valuable asset is trust. When reverberation is lost, it can spread over a wide area and cause system instability.

The financial sector needs to continue working together across borders to ensure its preparedness for future shocks. Mitigating the contagion of cyberattacks is especially important as attackers increasingly manipulate emerging technologies to harm systems. A recent example of the level of risk and cooperation required is the ransomware attack on Industrial and Commercial Bank of China’s US broker-dealer in November 2023, when the broker-dealer temporarily assumed his $9 billion debt. required the intervention of Chinese and US banks to ensure market stability. to a client.

Another example is the daily swap line (the liquidity of central bank funding markets during times of market stress) that was realized after the 2008 financial crisis, strengthened during the pandemic, and used again during last year’s banking period. (with the aim of improving the system). The turmoil engulfed multiple U.S. financial institutions and led to the collapse of Credit Suisse.

fight against the bad guysCombating fraudsters remains a top priority for financial institutions and an area that requires real, global cooperation to succeed.

According to the Global Coalition to Fight Financial Crime, the proceeds of financial crime exceed $3.6 trillion, with 75% of this amount coming from money laundering. Compliance costs are high and rising, estimated at more than $270 billion across major markets, with geopolitical risks, evolving criminal threats, and more driving costs higher.

Financial institutions are the first line of defense against illicit funds passing through the financial system. Tackling this critical challenge requires increased cross-border cooperation between financial institutions and law enforcement agencies regarding the sharing of information and best practices.

Climate finance for net zero Climate change is an existential concern that requires public and private cooperation, given its scale and associated costs.

Trillions of dollars have been allocated to renewable energy projects by banks and investors, but if we are to successfully transition industries and energy systems to net zero in the future, we will need to strengthen our approach. The role of breakthrough decarbonization technologies such as hydrogen, carbon capture and sustainable aviation fuels will be key to further reductions. Due to the high risks, these technologies lack funding and are not commercially available.

Despite the barriers, financial institutions and businesses are taking practical steps to stimulate the market for decarbonization technologies. First Movers Coalition, a multisectoral coalition of more than 90 global companies, leverages the purchasing power of its members to support implementation and has made $15 billion in total demand commitments. The group is working closely with financiers to improve the financial viability of these net-zero solutions.

The transition to net zero is estimated to cost $4 trillion to $6 trillion a year and will fail without mobilizing private capital. The government alone cannot afford to do this. Critical to the de-risking process, targeted policy incentives and the involvement of multilateral development banks are key to success. Financial institutions will need to mobilize more capital towards decarbonization technologies over the next decade to support net-zero targets.

Strengthen personal financial resilienceEnsuring economic health is becoming an increasingly lonely task, given the decline in defined benefit plans and the decline in government resources. As individuals live longer, the financial sector must focus on efforts to help people manage risk and improve their financial resilience.

One option the industry can pursue is reorienting financial planning to address important life events such as going to college or buying a home. Universal access to fair financial education from a young age, using behavioral finance principles to encourage personal savings, and developing transparent, customer-centric products can build economic resilience. This is a basic step to strengthening. In addition to this, further steps to democratize investing, such as making it easier for retail investors to access a wider range of asset classes and financial advice, would be a welcome step.

There are multiple areas of common concern where the benefits of cooperation far outweigh unilateral considerations. As we prepare for an eventful 2024, now is the time for real collaboration between financial stakeholders to build more resilient, trusted, accessible and sustainable finance. A system may emerge.