4 unprecedented disruptions to the global financial system
Climate change, migration, correspondent banking and cybercrime are putting unprecedented and unforeseen pressures on global financial markets.
They aren’t just disrupting the global financial system, but also affect how we approach international development work.
Let’s examine each trend:
1. “Greening the financial sector” is the new buzz term to finance a transition toward a climate-resilient economy and to help combat climate change. This topic is now getting a lot of attention from the G20 to the Financial Stability Board. The international community is trying to understand what this transition will imply: how resilient the financial sector is to deal with risks stemming from climate change, and how efficiently the financial sector can allocate financial resources. What we know is that currently fossil fuel subsidies and a lack of carbon tax are hindering the market from shifting financial resources from brown to green.
2. Globally, an estimated 65 million people are forcibly displaced. Migration, resettlement or displacement, of course, impact where and how to channel aid to those in need. But more importantly, as displaced people settle down -- no matter how temporary or long-term -- to become self-sufficient and thrive, they will need to establish new financial relations. This can be for simple transactions such as receiving aid through payment cards (as opposed to cash) or for sending remittances. Or it can be for something more complex as getting a loan to start a business.
3. At the same time, as the global banking industry is tightening regulations, large banks are withdrawing from correspondent banking and shutting down commercially unsustainable business lines. This recent phenomenon can have a huge impact in some regions on SMEs and on money transfer operators, which largely handle remittances.
4. Cybercrime is no longer a sci-fi thriller plot, but a tangible potential risk to both national and international financial markets. The focus on cybersecurity risk has increased along with the proliferation of internet and information technology. Fintech is transforming the financial industry -- by extending access to financial services to people and SMEs previously left out of the formal financial system – but is also raising many questions, including concerns about cybersecurity. The same technology advancements that are propelling fintech are also addressing cybersecurity risk. However, there is a need to develop an appropriate regulatory framework in combination with industry best practices. This framework is evolving and regulators are grappling with how and when to regulate.
As these issues show, there is no separation between international development, financial sector and governance: Without an inclusive, resilient, stable and efficient financial sector and sound governance, development can’t happen.
We need to start a conversation now on how best to address these disruptions and turn them into opportunities rather than allowing them to become destabilizing risks.
The world is already on board to achieve the Sustainable Development Goals by 2030. Eight of those goals are underpinned by finance, but none can be reached if the global financial system is in turmoil.
The world needs a stable, deep, inclusive, resilient financial sector.
Global financial centers and economic powerhouses recognize this and want to be engaged on the international development agenda.
Already at the World Bank Group, we work with countries to help them reach their financial sector development goals. Our support is organized along three key areas:
- Build countries’ financial stability and integrity by identifying weaknesses through diagnostics, support crisis preparedness, and improve regulatory and supervisory frameworks.
- Expand access to finance and foster financial inclusion for individuals and SMEs.
- Focus on long-term finance and risk management to help countries implement new instruments and capital market solutions to close financing gaps for climate change, agriculture, infrastructure, housing and jobs.
Complementing our country-level work, we closely engage with global standard-setting bodies to ensure that emerging markets’ voices, needs and concerns are heard when global standards are formulated.
The World Bank Group’s value-added at the national and global level is the same: to advocate for and represent developing countries’ needs.
This blog post is also available on the World Bank’s Voices blog.