Economists, critics, institutions and investors often talk about the global financial system. When stocks are up and trade is booming, they are praised for their contribution to prosperity; When markets crash and stocks fall, they blame their inhuman proportions or unreliable manipulators. But anyone who tried to diversify the portfolio with foreign equities or obtain bonds from another country quickly came to the same conclusion: the global financial system is not a single entity. “System” in the singular really means “systems” in the plural.
How do parts of the global financial system interact? Not always as we would like, as evidenced by the economic uncertainty caused by the COVID-19 pandemic. Under flows, investors diversify their portfolios across different asset classes to protect investments. However, market barriers often prevent access to these different asset classes.
Extensive regulation is a continuous theme, and as a result, the global market is truly a fragmented mosaic of different markets. The complexity, time and cost involved in doing business in these different jurisdictions are some of the major sources of friction in global markets.
Much of today’s commercial infrastructure is decades old, with many rules, customs and processes dating back to analogous times. In the 1970s and 1980s, national markets were a necessity and a necessity. The communications infrastructure that supported a fragmented network of brokers, each subject to its own legal regulators, was the only way to connect external investors in a world with fewer connections.
However, today the world is used to real-time communication – we communicate across continents and oceans in an instant. But when it comes to cross-border movement of value, the existence of parallel and isolated markets leads to administrative burdens, unnecessary costs and annoying delays.