CREFC Warns on a Piecemeal Approach to Global Financial Regulation

The Commercial Real Estate Finance Council (CREFC) reported this week that a joint paper published on July 9 by the Bank Policy Institute, the Global Financial Markets Association and the Institute of International Finance argues that fragmentation in global financial regulation puts competition, economic growth and financial system resilience at risk. It’s an approach which recently has gained traction in the U.S., but not only in this country. 

In the paper, titled The Costs of Fragmentation and Possible Solutions, the three associations note that the Financial Stability Board (FSB) launched an initiative in 2018 to explore ways to address the risk of market fragmentation, “which the industry welcomed. This initiative, conducted in coordination with other standard setters, such as the International Organization of Securities Commissions (IOSCO), has been and continues to be critical. However, despite this, we continue to see a growing level of fragmentation, which could reverse many of the achievements 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,” according to the paper. “It can increase regulatory arbitrage, disrupt the level playing field between banks and lead to an unintended shift of risk to less regulated parts of the market. Fragmentation also runs the risk of undermining the purpose and usefulness of the global standard-setting processes.”  

The organizations argue that fragmentation resulting from mis-calibration of global standards or excessive regulatory and supervisory divergence “can trap capital, liquidity, and risk in local markets; create significant financial and operational inefficiencies resulting in additional unnecessary costs to end-users; reduce the capacity of financial firms to serve both domestic and international customers; and may increase fragility, making markets more brittle and less resilient.” 

CREFC cited a 2018 survey from the OECD which estimated that a piecemeal approach to financial sector regulation costs the global economy $780 billion a year. Further, CREFC noted, a January 2025 World Economic Forum report stated that annual economic output losses from fragmentation could range from $0.6 trillion to $5.7 trillion, or about 5% of current GDP. 

The paper presents four recommendations: 

• The International Monetary Fund, FSB and Basel Committee should identify national rules that require financial institutions to establish local subsidiaries or restrict branch operations; 

• Jurisdictions should review whether ring-fencing requirements are properly calibrated; 
• Global regulators and industry should work together to address fragmentation and risks introduced by inconsistencies; and
• The FSB should re-evaluate the functioning of international colleges and case management groups. 

However, CREFC has reported that senior U.S. policymakers — including Treasury Secretary Scott Bessent, Federal Reserve Chair Jerome Powell, and Fed Vice-Chair of Supervision Michelle Bowman — “appear less interested than the previous administration in coordinating with international standard setters.”  

For example, Bessent told an American Bankers Association audience in April, “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 said it’s closely monitoring developments related to bank capital requirements, particularly the implications for CRE finance, “and will comment on relevant notices of proposed rulemaking.”