Policymakers should not exacerbate the risks of deglobalisation

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The writer is chief executive of UBS

As trade has globalised over the past 80 years, the role of banks has evolved with the needs of customers but remained relatively constant: providing the financial lubricant that keeps the world economy humming.

In an era where deglobalisation brings new risks, ensuring that capital flows to local and regional companies and communities is even more crucial to guarantee future prosperity. Yet divergent and often-burdensome regulatory constraints threaten to weaken, if not destabilise, the global financial system.

For most of my nearly 50 years in finance, markets operated on the assumption that global capital would flow with increasing ease. This was the foundation of the world economy following the second world war, fostering growth, innovation and improved standards of living.

That dynamic is now being upended. Trade tensions between the US and China have led to declines in the flows of goods, services, investments, and labour.

It is not just geopolitical rivals who have been harmed by rising economic nationalism. Consider the political reactions in Germany and Italy to a potential takeover of Commerzbank by UniCredit, or bipartisan US opposition to the proposed acquisition of US Steel by Japan’s Nippon Steel.

Such protectionist measures reflect growing sentiments that purport to prioritise national interests over global co-operation, but instead lead to missed opportunities for innovation and growth.

In this environment, everyone tends to suffer. As protectionism grows, the flows of capital needed for regions to prosper peacefully are stymied. The result is an increasingly fragmented financial system, with a higher cost of capital for borrowers and a knock-on impact on competitiveness, jobs, consumer prices and household prosperity.

Those in the most connected emerging markets stand to be particularly hard hit. And the implications of this fragmentation extend beyond economics, influencing social stability and international relations.

To prevent this from worsening, it is critical for policymakers and financial regulators worldwide to adopt a co-ordinated approach and ensure banks can operate effectively. Notwithstanding concerns around elements of the Basel III rules on bank capital, many of which I share, we are seeing a patchwork adoption of these reforms, with jurisdictions de facto charting their own paths.

This lack of cohesion creates inefficiencies and vulnerabilities in the global financial system and distorts competition. It also creates further potential for regulatory arbitrage that could produce new and unforeseen pockets of danger, such as with the uncontrolled expansion of shadow banking activities.

The need for strong, well-regulated banks capable of acting as engines of credit creation in their local communities should not come at the expense of nurturing globally connected and competitive institutions.

Moreover, a fragmented approach to rulemaking has the potential to be especially destructive at a time when many banks are faced with the need to restructure their operations and invest to ensure their future existence.

For example, the industry will need to contend with increased cyber security risks — not to mention the potential disruption posed by AI — and play its role in helping fund the estimated $3.5tn per year in investment needed to transition the global economy to net zero by 2050.

The banking sector must navigate these complex challenges while maintaining its fundamental role in facilitating economic growth and stability. Sadly, however, fragmentation looks set to worsen.

In a recent UBS survey, nearly all global central bankers said they believe the world is moving towards a more multipolar system. Only a third said the international financial architecture was resilient enough to survive current challenges without reform. They also embraced a view that one potential outcome of the US presidential election would be a rise in global protectionism.

We are set for a potentially long period of deglobalisation — one in which the coming few decades will be very different from those that shaped today’s business leaders. 

Although banking’s crucial role remains unchanged, barriers are slowly coming up everywhere. It is important that policymakers do not build them in the wrong places, so that banks can continue to act as catalysts for growth, innovation and prosperity not only in their home markets, but around the world.