Geopolitics reshaping finance: Prepare for shock-prone future

The international financial system has always operated downstream from the larger system of international order, undergoing profound realignments.

While geopolitics was once safely relegated to history, it now compels policymakers globally to ensure financial systems can operate through a more perilous risk environment.

Brad Jones, Assistant Governor (Financial System) at the Reserve Bank of Australia, highlighted this, noting it has been a central focus for the Council of Financial Regulators.

He outlined various first-order implications, including threats to critical payments infrastructure, key institutions from disinformation, fragmentation of cross-border capital flows, and challenges in strengthening financial safety nets.

Historically, geopolitical shocks have severely disrupted supply chains and energy markets, derailing bond and stock markets, as seen during World War I and the 1970s energy shocks.

Jones stressed that it is in our collective interest to prepare for a financial system that is more shock-prone in the future.

Geopolitical shocks have historically derailed financial markets, impacting bond and stock prices during both World Wars and the 1970s energy shocks.

Payment system contingency planning has long incorporated geopolitical risk, exemplified by the Deutsche Bundesbank's secret bunker during the Cold War.

Major geopolitical upheavals have also led to the creation of leading financial institutions like the IMF and World Bank.

Today, finance and technology are emerging as key focal points of strategic competition, forming an 'alternative battlespace' where coercion occurs just below the conflict threshold.

Cyber operations targeting critical financial infrastructure, such as those against Estonia (2007) and the US (2012), exemplify this, with AI and quantum computing adding to the challenges.