Andrew Bailey warns of risks to world economy posed by ‘fragmentation’

During a speech at the Financial System Conference in Dublin today (8 November), Bailey said the world economy is experiencing dissolution, which is “at risk of further such pressure”. 

This was partly due to the Covid-19 pandemic, which he said was the “first shock” to the supply chain system. However, he noted this was “not the end of the story” on fractures within the world economy. 

Russia’s war in Ukraine was another catalyst for increased division, as well as Brexit, which he said has “led to a reduction in the openness” of the UK economy. 

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Bailey added within financial services, the fragmentation damaged financial markets by reducing its size and making them “inherently less stable”. 

“Put simply, large markets and their infrastructures, which are run safely and to high standards, will support rather than endanger financial stability,” he said. 

“A very good example of this is clearing and central counterparties. Fragmenting this type of market infrastructure creates rather than reduces risks in markets. It also increases the cost of market functioning.”

The governor argued it is important to have global standards for the operation and oversight of such structures, and “strong co-operation” among the interested countries. 

“A necessary foundation for such openness in the financial system more broadly is robust global standards and trust,” he added. 

“I think we have made huge steps forward on this front since the global financial crisis. The standards and expectations are stronger, and the co-operation is real and deep-seated.”

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Bailey noted that cooperation with standard-setting bodies such as the global Financial Stability Board or IOSCO can result in much stronger international regulatory standards, and an “overwhelming case” for rejecting the “false allure” of fragmentation. 

He said “we must be alert” to the pressure for fragmentation, both in the global economy and financial system, as the costs that go with that “are real and undesirable”. 

“The better approach is strong articulation of a common public policy objective in terms of financial stability, accompanied by effective co-ordination and co-operation. These are not impossible ideals – we have real evidence of the system working,” he added.