The Effect of Global Regulatory Fragmentation on Systemic Financial Risk

Abstract

This article examines how global regulatory fragmentation affects systemic financial risk in an environment of deep financial integration, growing geopolitical tension, and rapid financial innovation. The main question is under what conditions divergent and overlapping rules across jurisdictions amplify, mute, or reshape the build-up and transmission of systemic risk. The study conducts a systematic literature review of peer reviewed work published between 2020 and 2024 that investigates links between regulatory fragmentation, financial fragmentation, and financial stability outcomes. The reviewed evidence shows that fragmented prudential and supervisory regimes are associated with segmented credit and capital markets, weaker risk sharing, and more fragile crisis transmission channels, while moderate diversity in rules can sometimes enhance competition and strengthen internal controls. Using narrative and thematic synthesis, the article compares how different strands of research conceptualize and measure fragmentation, identify transmission mechanisms, and assess policy trade-offs. The main findings highlight that the impact of fragmentation is conditional on its form, intensity, and the strength of cross border cooperation frameworks.