The year 2024 will be consequential for global financial and monetary systems. Despite political, economic and geopolitical uncertainties in the United States and elsewhere, the financial sector can play a constructive role on issues of systemic importance, thereby strengthening system integrity and global cooperation for the benefit of all.
Trouble brewing
Politically, the United States is fast approaching a highly contentious presidential election, accentuated by a divided electorate. Disunity and discord on multiple fronts raise the possibility that political instability in the world’s largest economy could have destabilizing implications that transcend borders.
The health of the economy is also uncertain in the United States, where interest rate reductions, marginally positive real gross domestic product growth and low unemployment are forecasted for 2024. Confidence in a “soft landing” has grown, yet it is still possible that inflation proves stickier and more volatile than assumed, which could catalyse a more bearish outcome economically.
Globally, geopolitical tensions are mushrooming. Brexit, China-US relations, and war in Europe and the Middle East are driving wedges between countries and forcing a recalibration of allegiances economically and militarily. These shifting dynamics are already evident in economic terms.
Trade among geopolitically aligned countries is up more than 6%, according to data from the United Nations Conference on Trade and Development, while other trade has dropped. A recent analysis by the International Monetary Fund suggests international trade restrictions could reduce global economic output by as much as 7% over time – roughly the size of the French and German economies combined, according to the authors.
Despite this very troubling backdrop, financial services can play a pragmatic and constructive role on issues of systemic concern, acting as a force for cohesion rather than friction. Notable areas of cooperation include safeguarding financial stability, combatting criminal actors, climate finance and bolstering individual financial resilience.
Financial stability
Safeguarding financial stability is imperative. As witnessed during the global financial crisis and more recently with the demise of Silicon Valley Bank, a financial institution’s most valuable asset is trust. When lost, the reverberations are far-reaching and potentially destabilizing for the system.
The financial sector must continue cooperating across borders to ensure preparedness against future shocks. Mitigating contagion from cyberattacks is of particular relevance as bad actors increasingly manipulate emerging technologies to the detriment of the system. In a recent example of the required level of risk and cooperation, the November 2023 ransomware attack on the Industrial and Commercial Bank of China’s US broker-dealer required intervention from Chinese and US banks to ensure market stability when the brokerage was left temporarily owing $9 billion to one client.
Another example pertains to daily swap lines (which aim to improve liquidity in funding markets between central banks during times of market stress) that materialized following the 2008 financial crisis, were strengthened during the pandemic, and used yet again last year during the period of banking turmoil that embroiled several US lenders and led to the demise of Credit Suisse.
Combating bad actors
Combating nefarious actors remains a top priority for financial institutions and represents a space where pragmatic, global cooperation is required for success.
According to the Global Coalition to Fight Financial Crime, proceeds from financial crime top $3.6 trillion, with 75% of this sum attributable to money laundering. Compliance costs are high and rising, with estimates topping $270 billion throughout key markets, with geopolitical risk and evolving criminal threats, among other factors, driving costs.
Financial institutions represent the first defence against illicit monies passing through the financial system. Enhanced cross-border cooperation between financial institutions and law enforcement on sharing information and best practices is required to tackle this significant challenge.
Climate finance for net-zero
Climate change is an existential concern that requires public-private cooperation, given the scale and associated costs inherent to the challenge.
While trillions of dollars have been allocated by banks and investors to renewable energy projects, in the future, an augmented approach is required to transition industries and energy systems to net zero successfully. The role of breakthrough decarbonization technologies, such as hydrogen, carbon capture and sustainable aviation fuels, will be key to further abatement. Due to higher risk profiles, these technologies are starved of funding and, therefore, not available commercially.
Despite barriers, financial institutions and corporations are taking pragmatic steps to stimulate the market for decarbonization technologies. The First Movers Coalition, a multisectoral alliance of more than 90 global corporations, has aggregated $15 billion in demand commitments, leveraging member purchasing power to support adoption. The group is working closely with financiers to improve the financial viability of these net-zero solutions.
With an estimated $4 trillion-$6 trillion annual price tag, the net-zero transition will fail without private capital mobilization: governments alone simply cannot afford it. Critical to the de-risking process, targeted policy incentives and engaged multilateral development banks are key success drivers. Financial institutions must further mobilize funding toward decarbonization technologies in the next decade to support net-zero goals.
Bolstering individual financial resilience
Securing one’s financial health has become an increasingly solitary pursuit, given the retreat in defined benefit plans and dwindling government coffers. As individuals live longer lives, it falls to the financial sector to focus on actions to support people in managing risk and increasing financial resilience.
One option the sector can pursue is reorienting one’s financial plan to address key life events, like going to school or buying a home. Universal access to impartial financial education from a young age, using behavioural finance principles to encourage individuals to save, and developing transparent and customer-centric products are foundational steps towards empowered financial resilience. Alongside this, further measures to democratize investing, such as facilitating access to a broader array of asset classes and financial advice for retail investors, would be welcome steps.
There are multiple areas of common concern where the benefits of cooperation far outweigh any consideration of unilateralism. As we buckle up for an eventful 2024, it is a time for pragmatic cooperation among financial actors from which a more resilient, trusted, accessible and sustainable financial system can emerge.
Weforum