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**CREFC Warns of Risks from Fragmentation in Global Financial Regulation**
A recent joint paper by the Bank Policy Institute (BPI), Global Financial Markets Association (GFMA), and Institute of International Finance (IIF) has raised concerns about the growing fragmentation of global financial regulation. Released on July 9, the report, titled *The Costs of Fragmentation and Possible Solutions*, warns that divergent regulatory approaches across jurisdictions could undermine competition, economic growth, and the resilience of the global financial system.
The Commercial Real Estate Finance Council (CREFC), summarizing the findings, highlighted that while international bodies such as the Financial Stability Board (FSB) have made efforts since 2018 to curb market fragmentation—often in coordination with IOSCO and other standard-setting bodies—fragmentation remains a pressing issue.
The paper cautions that this trend may reverse progress made since the Great Financial Crisis. “Fragmentation can undermine the progress that has been made in rebuilding the resilience of the global financial system and may result in negative consequences for economic growth and competitiveness,” the report states. It further warns of increased regulatory arbitrage, reduced competitiveness, and risk migration to less-regulated sectors.
Specific consequences of fragmentation cited in the report include:
– Trapping of capital and liquidity in local markets.
– Significant financial and operational inefficiencies.
– Increased costs for end-users.
– Diminished capacity of financial firms to serve global and domestic needs.
– Increased market fragility and volatility.
CREFC noted that a 2018 OECD survey estimated the global economic cost of uncoordinated financial regulation at $780 billion per year. More recently, a January 2025 report from the World Economic Forum suggested that fragmentation could shave between $0.6 trillion and $5.7 trillion from global GDP annually—roughly 5% of global economic output.
To address the issue, the paper proposes four key recommendations:
1. The IMF, FSB, and Basel Committee should identify national rules mandating local subsidiaries or restricting branch operations.
2. Jurisdictions should reassess the calibration of ring-fencing requirements.
3. Global regulators and industry stakeholders should collaborate to resolve inconsistencies that lead to fragmentation.
4. The FSB should re-evaluate the effectiveness of international supervisory colleges and case management groups.
Despite the urgency, CREFC notes a shift in U.S. policy that may signal reduced collaboration with international standard setters. Top officials such as Treasury Secretary Scott Bessent, Federal Reserve Chair Jerome Powell, and Federal Reserve Vice Chair of Supervision Michelle Bowman appear less inclined to adopt globally harmonized approaches than their predecessors.
In remarks to the American Bankers Association in April, Secretary Bessent stated, “We should not outsource decision making for the United States to international bodies. Instead, we should conduct our own analysis from the ground up to determine a regulatory framework that is in the interests of the United States.”
CREFC emphasized its ongoing efforts to monitor regulatory developments, particularly those affecting commercial real estate finance, and plans to provide formal input during upcoming comment periods for proposed rule changes.
This development underscores growing tension between domestic regulatory priorities and the need for international coordination in a deeply interconnected global financial system.
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