The World Economic Forum has sketched four scenarios on the probable evolution of the global financial system between now and the year 2020, based on a survey of the Forum’s industry partners, interviews with leaders in the field and extensive research.The scenarios, which form the subject of a WEF report, The Future of the Global Financial System: A Near-Term Outlook and Long-Term Scenarios, are determined by two critical uncertainties. The first is the pace of the ongoing geo-economic power shift from today’s advanced economies to the emerging world; the second is the degree of international coordination on financial policy.
Each of the four scenarios takes a myriad of underlying driving forces into account—such as the evolution of energy and commodity prices, global economic growth, fiscal policies, trade regimes, climate change, exchange rate policies, extremism, demographics and global wealth distribution.
Financial regionalism (Scenario I) is a world in which post-crisis blame-shifting and the threat of further economic contagion create three major power blocs on trade and financial policy (one each led by the US, the EU and China), forcing global companies to construct tripartite strategies to operate globally. As the crisis deepens in the US and Europe through 2010, the emerging markets walk away from a series of global talks, reject Western models, and form their own bloc of domestically focused economies. The US is isolated. With the exception of tourism and energy materials, most trade flows among the blocs decline sharply. Energy security becomes a key issue.
Financial regulation and governance are coordinated at a regional level and vary significantly between the three main trade and economic jurisdictions. The US continues to push a “market democracy” paradigm of minimal regulation. Eastern countries adopt a “controlled openness” system, while the EU turns inward, regulating financial institutions heavily.The separate capital and regulatory requirements in each bloc increase costs for global players; nationalized champions in the EU and Asia distort markets, particularly in insurance; while companies look to the East for both stability and yield.
Re-engineered Western-centrism (Scenario II) is a highly coordinated and financially homogenous world that has yet to face up to the realities of shifting power and the dangers of regulating for the last crisis rather than the next. With emerging economies severely affected by the global recession, the West maintains economic primacy and drives a new phase of growth. The financial world is once again a major engine of profitability and growth managed by insiders.
Existing financial institutions are reformed and there is a new, supranational financial regulator, the International Financial Stability Fund, with the majority of the world’s countries as members. Markets are criticized as being overly homogenized and highly vulnerable to contagion in the event of another shock.
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The industry structure is characterized by significant consolidation, thanks to a global level playing field and the after-effects of the 2008-09 recession. Western companies still dominate financial markets.
Fragmented protectionism (Scenario III) is a world characterized by division, conflict, currency controls and a race-to-the-bottom dynamic that only serves to deepen the long-term effects of the financial crisis. As the global recession bites, countries try to look after their own economic interests, blaming each other and turning to populist, protectionist policies.
Regulation is extremely fragmented by country and often extremely intrusive. The banking sector is nationalized in many jurisdictions. Restricted capital flows, the low-trust geopolitical environment and widespread trade protectionism mean very little financial policy cooperation among countries.
The industry structure is characterized by severe pressure on life insurers, with constraints on investing assets and growing liabilities. Global service providers are forced to hold capital locally, greatly reducing capital efficiency and forcing many to reduce their geographic footprint. Severe restrictions on capital and liquidity make banking a far less profitable business.
Rebalanced multilateralism (Scenario IV) is a world in which initial barriers to coordination and disagreement over effective risk management approaches are overcome in the context of rapid shifts in geo-economic power. The global community learns from its mistakes through sharing, realizing that meaningful collaboration is the only way forward. Major shifts in international institutions and a new recognition of the meaning of global governance imply that the financial system is better suited to the challenges of a complex, interdependent world in 2020, if not at all perfect.Emerging markets set the pace for economic growth, cooperation on financial policy and new approaches to systemic financial risk. The financial system is globally integrated but, given the rapid growth in the emerging markets, in many cases dominated by BRIC-focused players.
The new regulatory regime is characterized by a greater focus on systemic risk management through links to macroeconomic policy, confidence-building measures and contingency plans. The Bank for International Settlements becomes global lender of last resort.
As for industry structure, the Chinese insurance industry matures and successfully enters the US market following the 2017 financial crisis there. Increasing levels of global competition drive consolidation and specialization in asset management, leading to strategies such as scale-driven distribution and specialised fund management.