• This was a function of financial-sector deregulation, globalisation, and the dominant central-bank belief in not leaning against financial excess. Over this period, the growth of the financial economy has outpaced that of the non-financial economy. Despite the 2008 global financial crisis, the global financial system remains largely unchanged, with elevated leverage at the system level a source of systemic risk. The continued pressure on the pillars of globalisation is likely to affect how the global financial system operates and evolves.

Debt burden

A series of developments have reduced the constraints on the world’s financial system to create debt and credit. These include the transition to a fully fiat currency monetary regime following the US leaving the gold standard, increased adoption of inflation-targeting central banking, a structural decline in interest rates, and the globalisation of finance. This has led to a structural increase in debt relative to income (GDP) on an aggregate basis but differentiation between various regions.

Asset inflation

Monetary intervention and credit inflation have underpinned an inflation of both financial and non-financial asset prices. Returns from financial assets have outpaced income growth, leaving them particularly vulnerable to changes in economic/market conditions.

Imbalances and vulnerabilities

The functions of a global reserve currency are paramount to the health of the global economy. A global reserve currency has to be reasonably and efficiently accessible in all parts of the world. Prior to the global financial crisis the private-sector financial system ensured this was the case. However, while the crisis is over, global liquidity now ebbs and flows, and with it the availability of US dollars. Deterioration of dollar liquidity leads to economic and market weakness and vice versa.

Financial inclusion

Advances in technology, coupled with the desire to spur economic development, are expanding the provision of financial services to previously ‘unbanked’ populations, particularly in emerging markets. Meanwhile, legacy business models are being disrupted as new methods of finance emerge to provide consumers with a better deal.

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