Impact of Financial Fragmentation on Global Financial Stability

Financial fragmentation induced by geopolitical tensions can have significant implications for financial stability. It can affect the cross-border allocation of capital, national payment systems, and asset prices. The smallest increase in geopolitical tensions between investing and recipient countries can lead to a substantial reduction in bilateral cross-border portfolio bank allocations. The recent months have been challenging with persistently high inflation and a couple of bank failures that exposed vulnerabilities. These vulnerabilities, including liquidity, duration, and credit risks, have kept financial stability risks elevated.