Market globalisation to stall under regulatory weight

Geopolitics and regulation will throw the globalisation of capital markets decisively into reverse in the next five years, with Asia developing financial centres that rival London and New York, a leading advisory company has predicted.

The "Balkanisation" - or fragmentation - of global finance will determine the shape of capital markets in 2020, according to PwC, the professional services company. As capital retreats behind national borders, cross border flows will dry up and multinational banks may have to exit markets - or regionalise operations.

PwC's report on capital markets in 2020 warns that the implications of "severely Balkanised regulation" affecting the financial sector "are only beginning to be understood; the full impact on the global real economy will be felt over the next five years or so". But it also expects geopolitical tensions to increase instability - without naming particular conflicts or regions.

John Garvey, financial services adviser at PwC, said capital markets were being hit by the same forces creating an increasingly "multipolar" political world, hampering attempts to strike global trade deals and challenging Washington-based institutions such as the International Monetary Fund and World Bank.

"Capital markets are victims of the same thing and it is going to continue," Mr Garvey said.

China's promotion of an Asian Infrastructure Investment Bank "is a perfect example of Balkanisation", he added.

PwC argues traditionally restrictive markets such as China, India and Korea "will be joined by others - even developed countries - that limit the presence of foreign institutions through local policy and subtle preferences for domestic institutions".

"Geopolitical uncertainty and the Balkanised nature of financial regulation will continue to swing the pendulum away from the globalisation of financial markets," the report predicts.

By 2020, small countries with large financial sectors would have shrunk their banks relative to their economic size. Banks which historically drew much of their revenues from overseas operations would become more domestically focused or turn overseas operations into subsidiaries.

PwC notes, however, that Europe's attempts to build a "capital markets union" and common bank supervisory systems went against the global trend.

The dominance of New York and London as global financial hubs was being questioned by the rise of the Chinese economy and the Asia-Pacific region more generally, PwC argued. Its poll of 250 capital market executives showed more than three-quarters expected an Asian rival to have emerged by 2020.

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Among the biggest fears of capital market executives, according to PwC, were of losing market share to non-traditional market players and of regulation restricting their ability to generate profitable businesses. But top of their list were worries about a "crippling" global cyber attack.

PwC notes: "The emergence of cyber risk is a potentially mortal threat for all capital markets participants and users . . . Nation states, criminals and terrorists are devoting an increasing amount of resources to disrupt, steal from and manipulate the capital markets.

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