A. Institutional Informality

In sharp contrast to other areas of international concern, such as trade, investment, or climate change, most norms and rules that govern international finance consist of “soft law” generated by international standard-setting bodies such as the Basel Committee on Banking Supervision and the International Organization of Securities Commissions (IOSCO). These bodies began their lives as informal networks of national regulatory agencies, and although they now have more elaborate charters and broader memberships, they lack international legal personality or the authority to adopt binding norms or decisions. Instead, the standards they adopt typically rely for their legal force on their members’ domestic rulemaking authority. In many instances, they consist of studies, recommendations, or best practices that lack any binding force vis-à-vis members or market actors.

The procedures by which these bodies issue standards and recommendations are also relatively informal. Their deliberations are confidential, outputs are typically adopted by consensus rather than vote, and—with limited budgets and personnel—standard-setters rely extensively on their members’ capacity and expertise. To monitor implementation, they rely primarily on peer review. The Basel Committee and other standard-setters have sought to increase transparency, for instance by creating websites and adopting public notice-and-comment procedures for important standards.Footnote ²⁵ After the global financial crisis, members of the Group of 20 (G-20) sought to rationalize the system by creating the Financial Stability Board (FSB), a “network of networks” tasked with coordinating financial standard-setting and financial stability oversight.Footnote ²⁶ International financial institutions, such as the IMF and the World Bank, took on a more active role in monitoring implementation.Footnote ²⁷ Nevertheless, the overall governance structure remains largely informal and decentralized.Footnote ²⁸

Debate persists on the origins and effectiveness of this informal regime. Functionalist explanations emphasize the benefits of informal governance: transaction costs are lower, standard-setters benefit from their members’ collective expertise, and informal procedures and norms enable rapid regulatory responses to new market and technological challenges.Footnote ²⁹ In this view, “global oversight enjoys respect, compliance, and an increasing degree of order.”Footnote ³⁰ Other explanations emphasize historical contingency. Treaties and organizations that manage the world economy, such as the General Agreement on Tariffs and Trade (GATT) and IMF Articles of Agreement, emerged at a critical historical juncture when major states were willing to create formal, legalized regimes. At that time, private international finance was a marginal policy concern.Footnote ³¹ Only later, as cross-border financial flows exploded, did national regulatory agencies face new policy challenges and attempt to address them through bottom-up regime-building. In contrast with functionalist explanations, historical explanations suggest that informal governance may be a second-best outcome, capable of addressing only some of the problems generated by international finance.Footnote ³²

Whatever the cause, distinctive patterns emerged in international financial governance. The first is a significant degree of insulation from overt political intervention. Unlike formal international organizations, where governments appoint agents and typically direct their votes, financial standard-setting bodies bring together national central banks and regulatory agencies. These bodies typically enjoy a degree of independence within national legal systems.Footnote ³³ Their representatives are career central bankers and regulators, rather than diplomats or political appointees. The nature of their membership thus imparts upon standard-setting bodies a technocratic, rather than political, ethos. These bodies’ narrow substantive mandates, such as banking, securities, or insurance regulation, reinforces this technocratic orientation by limiting opportunities for political linkages and logrolling across issue-areas, typical of broader organizations like the United Nations or WTO.

Another distinctive feature of international financial governance is the preservation of national policy autonomy. Unlike the GATT or other WTO agreements, whose breach can lead to international dispute settlement and trade retaliation, international financial standards are non-binding and typically lack dispute resolution and enforcement mechanisms. Instead, compliance with these standards is assessed through peer review. This process requires willingness on the part of members to report on their own progress, answer questionnaires, participate in meetings to discuss accomplishments and challenges, and host foreign colleagues for peer review visits. The lack of formalized enforcement mechanisms means that standard-setters have limited capacity to apply external pressure on members. The result is a system that requires a meaningful degree of collaboration and trust among officials.Footnote ³⁴ In turn, this presupposes good faith: members must be confident that their colleagues see the world through similar eyes and pursue common technocratic objectives, such as financial stability, rather than economic or political gains for their own nation at others’ expense.

B. Multilateralism and Non-discrimination

Apart from decision-making procedures, international regimes consist of rules, which are “specific prescriptions or proscriptions for action” and norms, which are “standards of behavior defined in terms of rights and obligations.”Footnote ³⁵ Although the rules and standards generated by financial standard-setting bodies are not legally binding, the volume, range, and detail of their output is impressive. The FSB maintains a compendium of standards that contains hundreds of entries, ranging from well-known documents like the Basel Committee's accords on bank capital requirements, its Core Principles for Effective Banking Supervision, the FSB's Key Attributes of Effective Resolution Regimes for Financial Institutions, IOSCO's Multilateral Memorandum of Understanding (MMOU), and the International Association of Insurance Supervisors’ (IAIS) Insurance Core Principles, to much more specific standards relating to, among others, cryptoassets, climate-related risks, Islamic finance, money market funds, and environmental, social, and governance (ESG) ratings.Footnote ³⁶

A more difficult question is whether, apart from this profusion of specific rules and standards, the IF regime also comprises general norms of behavior. Unlike trade or investment, the regime lacks explicit and legally enforceable general norms such as the most-favored-nation clause (MFN), national treatment (NT), or fair and equitable treatment. Thus, states generally remain legally free to discriminate among their partners and to favor domestic firms.Footnote ³⁷ Yet, scholars recognize that despite lacking such treaty obligations, international financial regulation rests on a set of implicit norms, “rules of the road through which financial policymaking is now realized.”Footnote ³⁸ The most salient are MFN and NT norms analogous to those found in international trade and investment. Together, these two implicit norms embody the regime's orientation toward multilateralism and openness.

According to Zaring, these norms are embedded in international financial bodies’ practice of developing uniform international regulatory standards and promoting their universal adoption. This practice has two crucial implications. First, it means that “the regulatory regime offered . . . applies to all members.”Footnote ³⁹ If a country adopts and complies with international standards, its firms should be granted access to others’ markets on a non-discriminatory basis. The practice is “rooted in an aversion to the types of side deals . . . that the MFN principle in trade was designed to prohibit.”Footnote ⁴⁰ By the same token, foreign firms that comply with international standards should be granted the same privileges as domestic firms—an implicit NT principle.Footnote ⁴¹ Indeed, as Zaring shows, the goal of creating a “level playing field” is ubiquitous in international financial regulators’ rhetoric.Footnote ⁴² Multilateralism is also reflected in the system's institutional evolution, as standard-setting bodies like IOSCO, IAIS, and—to a lesser extent—the Basel Committee became more inclusive over time, and political leadership shifted from the Group of 7 (G-7) to the broader G-20, which includes leading developing states.Footnote ⁴³

These norms also manifest themselves in the practices of national regulators, who generally do not condition market access on bilateral deals but on meeting uniform standards. For example, to establish a U.S. presence, a foreign bank must demonstrate that it is “subject to comprehensive supervision or regulation on a consolidated basis . . . in its home country.”Footnote ⁴⁴ In making this determination, the Federal Reserve has looked at whether the bank's home state subscribes to Basel standards, and at IMF reports on their implementation. Under this regime, banks from China, among others, have been allowed to enter U.S. markets.Footnote ⁴⁵ Likewise, the Securities and Exchange Commission (SEC) applies uniform registration and disclosure standards to foreign private issuers that issue or list securities in the United States, regardless of their country of origin. The NT principle is also found in national regulatory systems. For example, U.S. law incorporates a longstanding commitment to “parity of treatment between foreign and domestic banks in like circumstances.”Footnote ⁴⁶

Thus, despite the lack of legally binding MFN or NT obligations, the IF regime incorporates general norms of behavior that reflect an ethos of multilateralism and non-discrimination. The implicit MFN norm precludes preferential treatment of select partners and discourages fragmentation. The implicit NT norm precludes discriminatory regulation that would close domestic markets to foreign firms. Like in trade and investment, it thus promotes liberalization. At the same time, it also protects members’ regulatory objectives by ensuring that foreign firms comply with appropriate standards when they enter a host state's market. The Basel Committee's injunction that regulators should “require the local operations of foreign banks to be conducted to the same standards as those required of domestic banks”Footnote ⁴⁷ responds not just to the risk that host regulators might set discriminatorily high standards, but also that they might neglect oversight of foreign banks active in their territory.Footnote ⁴⁸ This dual impact of these implicit norms of behavior hints at the more fundamental principles that underlie the regime.Footnote ⁴⁹

C. Expert Regulation

Beyond its specific decision-making procedures, rules, and norms, an international regime comprises principles, which are “beliefs of fact, causation, and rectitude.”Footnote ⁵⁰ For example, “a liberal international regime for trade is based on a set of neoclassical economic principles that demonstrate that global utility is maximized by the free flow of goods.”Footnote ⁵¹ It also rests on a set of other beliefs, some normative (free trade is inherently peaceful) and others positive (without cooperation, states tend to adopt mutually destructive protectionist policies). The regime's specific features flow from these principles: a structure for negotiating tariff commitments, overarching anti-discrimination norms, and binding dispute resolution. Principles, however, do more than guide the regime's details: they provide coherence to the regime and allow it to adapt and endure. This is why, although rules and decision-making procedures can change within a regime, “[c]hanges in principles and norms are changes in the regime itself.”Footnote ⁵²

What principles animate international financial governance? Because the regime lacks a formal treaty framework, organizational hierarchy, or canonical statements of purpose, these principles must be inferred from its more specific features and its historical context.

As noted above, the IF regime supports liberalization of international financial flows. By creating uniform regulatory standards and fostering an ethos of non-discrimination, it eliminates obstacles to cross-border finance. This function, however, is less central to the IF regime than to the trade regime. Unlike the latter, the former is not structured as a vehicle to negotiate and enforce reciprocal market access commitments, a function to which it would be ill-suited.Footnote ⁵³ In sharp contrast to the successive rounds of GATT negotiations that liberalized world trade, financial globalization originated in causes external to the IF regime: technological change; the collapse of the Bretton Woods fixed exchange rates system; and a widespread policy shift toward open capital accounts.Footnote ⁵⁴ The regime thus emerged against a background of rapid financial globalization. Indeed, the system presupposes financial globalization, without which it would lack a rationale; its standards often facilitate cross-border market integration; and most of its practitioners likely endorse financial openness.

The IF regime's core objective, however, has been to manage financial globalization by means of cooperation among expert national regulatory agencies. National officials constructed the regime to address the challenges the rise of cross-border finance posed to their domestic regulatory mandates.Footnote ⁵⁵ The early history of the regime makes this orientation clear: cooperation emerged on a “problem-driven schedule” as regulators gathered to solve “specific cross-border problems or crises” such as bank failures or securities fraud.Footnote ⁵⁶ These ad hoc efforts eventually grew into more prescriptive standards, more detailed cooperation arrangements, and more formal standard-setting procedures. The fundamental goal, however, remained the same: national regulatory agencies sought to address new problems that arose from financial globalization and threatened to undermine their domestic regulatory mandates. They acted collectively to preserve the effectiveness of national financial regulation.

Thus, the policy objectives pursued by the IF regime are essentially the same as those found in national financial regulation worldwide. They include financial stability, market integrity, investor and customer protection, crime prevention, and preserving competition.Footnote ⁵⁷ For example, standards such as the Basel Concordat, Basel capital accords, and the FSB's Key Attributes, all aim at preserving financial stability by preventing bank failures and facilitating effective resolution of failed institutions. The IF regime advances customer and investor protection through initiatives such as the IOSCO MMOU, which institutes mutual assistance in investigating cross-border fraud and other securities law violations. International standards governing financial benchmarks, securities disclosure, or ESG ratings, promote market integrity. Anti-money laundering and terrorist financing standards aim to prevent financial crime and facilitate law enforcement.

The regime's starting point is the reality of financial globalization, which it takes for granted but also—at least implicitly—regards as desirable. It espouses the standard economic view that a market-based financial system produces collective gains by allocating capital to its most efficient uses, fostering economic development, improving risk allocation, and mitigating incentive problems.Footnote ⁵⁸ In this vision, the role of regulation is to address market failures that could prevent achievement of these benefits. In the international context, where cross-border finance threatens to undermine national regulation, effective international cooperation is required. Thus, the IF regime ultimately rests on a logic of absolute gains: a well-regulated, market-based international financial system benefits all. The role of national regulators acting together is to coordinate their action to sustain these gains.

The IF regime's institutional features reflect its technocratic orientation. The main actors are central banks and regulatory agencies, which generally benefit from independence in pursuing their mandates. As a result, international finance bodies can pool their expertise to develop the best technical solutions to cross-border problems without political interference.Footnote ⁵⁹ This orientation toward technocratic goals and political neutrality extends beyond standard-setters to other actors of international finance, such as private service providers.Footnote ⁶⁰ SWIFT, the world's leading financial messaging system, calls itself “a neutral utility with a global systemic character” that “always act[s] in the interests of the entire member community and in keeping with our mission of supporting the resilience and integrity of the global financial system.”Footnote ⁶¹ Global banks have also traditionally taken pride in serving clients in numerous jurisdictions regardless of political differences.Footnote ⁶² The Federal Reserve Bank of New York, which holds U.S. dollar accounts and gold reserves for numerous countries, tried to insulate these from legal process and political interference.Footnote ⁶³ These institutions all played their part in maintaining a market-based, rather than politically governed, international financial system.

* * * *

In sum, the IF regime as it evolved from the 1970s to the present day is characterized by several features. At the most fundamental level, it rests on a principle of expert regulation: its goal is to manage policy challenges generated by cross-border finance through cooperation among expert national regulatory agencies, against a background of liberalization and financial globalization. It incorporates implicit norms of multilateralism and openness that parallel those found in trade and investment and shape the regime's many specialized rules and standards. The regime's core organization and decision-making procedures reinforce its technocratic orientation: institutional informality, peer review, soft law norms, domestic implementation, agency independence, and political neutrality.

A. Geopolitical Competition and the Turn to Geoeconomics

Like many terms that gain popularity in policy debate, “geoeconomics” is imprecise, and commentators use it in several ways.Footnote ⁶⁴ In an influential book, Robert Blackwill and Jennifer Harris define it as “the systematic use of economic instruments to accomplish geopolitical objectives.”Footnote ⁶⁵ In contrast with traditional economic approaches, geoeconomics “view[s] the economic actions and options of a given state as embedded within larger realities of state power.”Footnote ⁶⁶ In such an account, economic instruments such as trade, investment, aid, money, and energy, become tools of state power, used to advance non-economic foreign policy goals.Footnote ⁶⁷ Examples abound: Russia's threats to cut off Europe's gas supply to dissuade EU and North Atlantic Treaty Organization (NATO) expansion, its offers of financial aid to Greece and Cyprus aimed at dividing the EU, China's extensive lending in Africa and Latin America, and India's development of regional economic ties to counterbalance Chinese influence.Footnote ⁶⁸

Although there is no bright-line distinction between economic and geopolitical goals, Blackwill and Harris contend that the latter differ in fundamental ways. According to economists’ “positive-sum logic,”Footnote ⁶⁹ international economic policy should aim to maximize economic welfare and be insulated from extraneous foreign policy goals.Footnote ⁷⁰ In sharp contrast, “[t]he logic of geopolitics is traditionally zero-sum.”Footnote ⁷¹ States compete for authority and power, and one state's gain is another state's loss. Thus, when economic tools are turned to geopolitical ends, the logic governing their use shifts radically. In assessing policy options, states look beyond economic costs and benefits. A state may choose to pursue an economically destructive policy—such as cutting energy exports to its largest customer—to achieve a geopolitical goal—such as dissuading it from supporting its opponent in a war. Indeed, “when put to geopolitical use, economic instruments can produce outcomes that are every bit as powerful and as zero-sum as those resulting from traditional military showings of state power.”Footnote ⁷²

At its heart, Blackwill and Harris's book was a call for the United States to abandon its reluctance to deploy economic tools for geopolitical ends. States around the world, including Russia and China, they contended, “now routinely look to geoeconomic means, often as a first resort, and often to undermine American power and influence.”Footnote ⁷³ Since then, the U.S. government has answered the call, leveraging the country's economic might to advance its security interests. Europe, another longstanding champion of a liberal international economic order, has also begun to shift its approach. In a widely publicized speech, Josep Borrell, the EU's chief diplomat, declared that in “a competitive world where everything is being weaponised,” he concluded, Europe must eliminate “silos,” act faster, and link its economic and security policies.Footnote ⁷⁴ The catalyst for this shift was Russia's full-scale invasion of Ukraine, a direct threat to Europe's security.

Anthea Roberts, Henrique Choer Moraes, and Victor Ferguson elaborate on the rise of geoeconomics and its implications for the international trade and investment order.Footnote ⁷⁵ They contend that the “Neoliberal Order” that prevailed after the end of the Cold War, and whose rules were based on “an ‘economic’ mindset . . . primarily concerned with maximising economic gains for states” is giving way to a “Geoeconomic Order.”Footnote ⁷⁶ Like Blackwell and Harris, Roberts and her coauthors identify the critical change as “a shift in focus from absolute gains (based on the assumption of a positive-sum game) to relative gains (based on the concern that one party has gained disproportionately or that one party's gain amounts to another party's loss, i.e., a zero-sum game).”Footnote ⁷⁷ This shift arises from changes in the balance of geopolitical power, most notably the rise of China, that elevate security concerns to center stage.Footnote ⁷⁸

The rise of geoeconomics has several more specific implications for state behavior in international economic relations. First, as Henry Farrell and Abraham Newman have described, powerful states increasingly “weaponize interdependence,” a phenomenon in which “states with political authority over the central nodes in the international networked structures . . . can weaponize networks to gather information or choke off economic and information flows, discover and exploit vulnerabilities, compel policy change, and deter unwanted actions.”Footnote ⁷⁹ Second, as states become more concerned with geopolitical competition and relative gains, they realize that “interdependence . . . can also generate strategic vulnerabilities,”Footnote ⁸⁰ not just because other states might weaponize networks, but also because their state has grown dependent on global supply chains, lost industries deemed essential for its security, or simply fallen behind in economic or technological competition. This realization, in turn, generates calls for “greater resilience, including through increased self-reliance.”Footnote ⁸¹

The turn to geoeconomics affects the international trade and investment order in several ways. From a limited and mostly unused exception to the order, security becomes a crucial battleground as “states are increasingly relying on claims of national security in order to avoid the application of international . . . obligations and to limit or oust judicial review.”Footnote ⁸² Geoeconomics reverses the trend toward multilateralism, legalization, and judicialization that has prevailed since the 1990s, notably with the creation of the WTO and the development of the investment protection regime. Faced with fundamental security concerns and worried about relative gains, great powers find it harder to agree on common rules or to trust third-party decisionmakers.Footnote ⁸³ To the extent they engage with the regime, major powers try to secure acceptance of their preferred rules, those that privilege their own “style of play” and hinder the adversary. If they cannot secure their preferred outcomes in the multilateral regime, they turn to like-minded states and cooperate on a limited basis, generating “sectors of influence” and fragmenting the system.Footnote ⁸⁴

Finally, the rise of geopolitical competition has thrown into question the ability of states with different political regimes to cooperate on economic matters. Today's geopolitical cleavage is often described as a clash between democracies and autocracies, each embracing a radically different set of norms, values, and ideologies—including opposing conceptions of international law.Footnote ⁸⁵ In the economic realm, the WTO model has struggled to respond to China's distinctive model of state capitalism, which contradicts its liberal economic premises.Footnote ⁸⁶ U.S. and Chinese models of technological competition clash, compromising attempts to develop common rules.Footnote ⁸⁷ Authoritarian regimes’ greater willingness and ability to control information flows and strictly curtail independent institutions and civil society also clash with a liberal economic regime's demands for transparency and the rule of law. At the ideological level, the notion that international economic institutions and markets can remain neutral comes under increasing pressure as geopolitical competition takes moral and existential overtones.Footnote ⁸⁸

Since the authors above wrote, geoeconomics have become ever more ubiquitous in international politics. A major catalyst was Russia's full-scale invasion of Ukraine in 2022. If, as recently as 2021, “it remain[ed] unclear what a ‘geoeconomic EU’ would look like or what would be the ‘European Way’ when it comes to geoeconomic issues,”Footnote ⁸⁹ Europe has now ramped up its sanctions regime, adopted new instruments to screen foreign investment and resist foreign economic coercion, and reduced its dependence on Russian energy. The United States has shown little appetite to reinvigorate the multilateral trade and investment system, instead ramping up its use of tariffs, sanctions, and export controls against China. China's use of trade and investment tools to advance its political goals also continues. In short, “[t]he world has seen a stunning rise in the willingness of great powers to use their trade and financial relationships for geopolitical ends.”Footnote ⁹⁰

B. Geopolitics and the International Financial System

The resurgence of geopolitical competition and the rise of geoeconomics have already transformed international trade and investment. How do these developments affect the international financial system and its regulation?

At the macroeconomic level, one connection between finance and geopolitics has long attracted attention: the relationship between a nation's external position (i.e., its current account balance and foreign assets holdings) and its geopolitical autonomy.Footnote ⁹¹ As China ran large trade surpluses beginning in the 1990s, it rapidly accumulated the largest foreign reserves in history, eventually peaking at about $3 trillion dollars in 2011.Footnote ⁹² Much of these reserves consisted of U.S. Treasury and Agency securities, raising geopolitical concerns in both countries: What if China dumped its U.S. assets during a conflict, or even preemptively, to compromise the United States’ ability to fund its military dominance? On the other hand, what if the United States defaulted, or froze Chinese-held U.S. assets? Larry Summers first identified this “balance of financial terror” in 2004. It loomed large during the 2008 financial crisis, and despite a decline in Chinese U.S. dollar holdings, it continues to inform strategic thinking about a potential U.S.-China clash over Taiwan.Footnote ⁹³

This issue, while salient, is far from the only connection between geopolitics and international finance. These links run much deeper and implicate multiple aspects of international finance and its regulation. To start, consider the fundamental economic functions of the international financial system. In a classic paper, Zvi Bodie and Robert Merton state that “the primary function of any financial system is to facilitate the allocation and deployment of economic resources, both across borders and across time, in an uncertain environment.”Footnote ⁹⁴ This primary function breaks down into several more specific ones, including: “clearing and settling payments,” “pooling resources . . . [and] transferring [them] across time and space,” and “managing risk . . . providing information . . . [and] dealing with incentive problems.”Footnote ⁹⁵

Each of these functions has clear geopolitical implications. Their achievement, who achieves them, and the ways in which they are achieved, affect the strengths, vulnerabilities, and strategic options available to states. At the domestic level, clearing and settlement of payments is a critical function: disrupting a country's payment system could paralyze its economy. This provides both an offensive opportunity for adversaries and a defensive fear: the integrity of a state's payment system must be protected. At the international level, money is the lifeblood of international trade and investment: access to cross-border payment systems affects a country's ability to achieve both economic and political aims. As will be seen, this reality has become very salient in the realm of financial sanctions, which aim to exclude certain actors and nations from international payments. Both domestically and internationally, payment systems are also a vital source of security-relevant information that can be monitored to detect and combat threats such as crime, terrorism, espionage, or foreign interference.Footnote ⁹⁶

Likewise, how economic resources are pooled, who manages them, and where they are allocated, are concerns of vital strategic importance. In wartime, states took direct control of banking and financial systems to allocate resources to defense production. In peacetime, the ability to shape the pooling and allocation of capital can serve numerous geopolitical objectives. Nations may want to steer resources to industries they believe essential to their security, or to gain leadership in strategically important global industries. Even when they stop short of directly allocating capital, nations may want to insulate the process from foreign interference, for example by restricting foreign ownership of financial intermediaries. At the international level, capital allocation can play a vital strategic role: nations may steer investment to allies to encourage “friendshoring” or build up a network of client states, help their friends combat financial crises, and support their allies’ defense efforts. Conversely, they may want to prevent capital from flowing to antagonists.

The financial system's risk-allocating, information-generating, and incentive-setting functions also implicate geopolitical concerns. In practice, these functions encompass “producing information ex ante about possible investments . . . monitoring investments and exerting corporate governance . . . [and] facilitating the trading, diversification, and management of risk.”Footnote ⁹⁷ They require transparency: accurate information about securities issuers, for example, must be available. This is why securities regulation involves mandatory disclosure of issuers’ financial condition, business lines and prospects, and risk factors. Efficient markets also require third parties to generate and circulate information: an ecosystem of analysts, rating agencies, and market participants.Footnote ⁹⁸ These functions also require investors to monitor and control their investments, including through enforceable legal rights.Footnote ⁹⁹ These desiderata can clash with strategic and security concerns: nations may prefer to restrict information flows, maintain control over critical industries, and deprive investors of legal recourses over capital allocation decisions driven by geopolitical objectives. These clashes may be more acute in political regimes that restrict information flows and lack independent judiciaries.

Beyond its relevance to states’ geopolitical objectives, other characteristics of the international financial system make it a potential battleground for competition and conflict. Financial liberalization has prompted the growth of global infrastructure whose “asymmetric network structure” gives some states outsized capacity to gain strategic advantage, as illustrated by SWIFT sanctions.Footnote ¹⁰⁰ The United States has the world's largest and deepest financial markets, which makes exclusion costly, and a legal system that can impose large costs on private actors to align their actions with U.S. interests.Footnote ¹⁰¹ China, for its part, has the world's largest foreign exchange reserves, which can be deployed in multiple ways to advance geopolitical goals. Its political system, large state-owned financial sector, and security apparatus also give it greater ability to steer the behavior of regulators and firms. These different tools available to states may dictate different geoeconomic strategies.Footnote ¹⁰² At the same time, large classes of states—developing countries, but also advanced mid-size economies—may lack much in any capacity to use finance to advance their goals. As geopolitical competition becomes more salient, so will these differences in the “structural features—or geoeconomic endowments—that dictate how effective a country is likely to be in the use of geoeconomic tools.”Footnote ¹⁰³

Finally, states have powerful tools to reshape finance to serve their geopolitical goals. Chief among these are existing national financial laws and institutions, which typically give regulatory agencies considerable discretion to set and implement policy. For example, in the United States, the SEC, the Commodity Futures Trading Commission (CFTC), and banking regulators can adopt binding rules on numerous aspects of U.S. securities and banking markets. They also have vast supervision and enforcement powers that can be used to shape the behavior of regulated financial institutions and other market participants, ranging from formal enforcement action to behind-the-scenes “moral suasion.”Footnote ¹⁰⁴ These tools have traditionally been used to pursue traditional regulatory objectives like financial stability, investor protection, and market integrity. But as Blackwill and Harris note, “[i]f a sharpened brand of financial and monetary geopolitics does resurface, it is doubtful that the current norms—unwritten rules that keep the work of Western foreign ministries comfortably distant from that of finance ministries and central banks will serve either side well.”Footnote ¹⁰⁵ In the aftermath of the financial crisis, politicians in multiple countries asserted greater control over financial regulation.Footnote ¹⁰⁶ These reforms did not directly aim to inject geopolitics into financial regulation, but they may have prepared the ground for greater intervention in the service of geopolitical objectives.

C. The Changing Politics of International Finance

The rise of geopolitical competition, by generating incentives for states to intervene in international finance, sets the stage for what could be a major shift in international financial governance. As seen above, scholarship on geoeconomics and the functions of the international financial system suggests that, as states become more concerned with geopolitical rivalry, their interventions will be characterized by increasing use of economic tools for non-economic foreign policy goals, a shift from positive-sum cooperation to zero-sum competition, weaponization of financial networks and markets, heightened concern with strategic vulnerabilities and resilience, and a growing divide between authoritarian and democratic states. As these trends materialize, the politics of international financial governance will change, as states deploy an array of tools to turn international finance to their geopolitical ends.

This claim should not be misunderstood to imply that there was a time “before politics” in international finance, such that the rise of geopolitics could be seen as breaching a previously impermeable barrier. International financial governance has never been apolitical. As Eric Helleiner documented more than three decades ago, policy decisions by states—notably to adopt a permissive approach to the growth of the Eurodollar market, to gradually abolish capital controls, and to act to prevent and contain financial crises—played a central role in the reemergence of private international finance.Footnote ¹⁰⁷ Likewise, key international regulatory initiatives had their origins in political bargaining. Thomas Oatley and Robert Nabors showed how the United States and United Kingdom, fearing a competitive disadvantage for their banks after the 1980s Latin American debt crisis, pressured Japan to adopt uniform bank capital standards.Footnote ¹⁰⁸ Since then, the Basel Committee and other bodies have frequently been riven by policy clashes among powerful states trying to secure adoption of standards that advance their preferred policy objectives or favor their own economies.Footnote ¹⁰⁹ This phenomenon persists today with Transatlantic debate over implementation of the “Basel III Endgame.”

In recent years, states have also clashed over enforcement policy. As the United States imposed massive fines and extensive compliance requirements on large foreign banks, their home states reacted with anger, complaining that these unilateral actions threatened their financial stability, undermined their policy autonomy, and despoiled their shareholders. In a famous episode in 2014, President Hollande of France intervened directly with President Obama at a state dinner to protect BNP Paribas against massive fines for sanctions violations.Footnote ¹¹⁰ The British government also pleaded for the U.S. Department of Justice to refrain from punitive fines against UK banks.Footnote ¹¹¹ U.S. efforts to compel Swiss banks to disclose information about U.S. account holders led to years-long negotiations at the highest levels.Footnote ¹¹²

Thus, international finance and its governance have long been intertwined with politics, with no impermeable wall of separation. The claim made here not that geopolitical competition is politicizing a previously apolitical system, but that it is introducing, on a large scale, a particular form of political intervention from which the IF regime had largely been insulated.

While the regime accommodated a substantial element of political negotiation and conflict, these usually took the form of distributive and enforcement conflicts. Participants in the Basel Committee might jostle over bank capital requirements for home mortgages or corporate equity because they disagreed on the risk these assets posed, or simply because their respective banks invested more in one or the other. They might quarrel over bank fines for money laundering because they envisioned a different balance between financial stability and crime prevention, or simply because of lobbying by their banks’ shareholders. Sometimes, for similar reasons, states took advantage of the lack of enforcement to depart from aspects of international standards they disliked. When the stakes were high enough, a dispute might escalate into a diplomatic dispute to be handled by politicians.

However, these debates over the choice of substantive standards, the distribution of gains, and compliance ultimately took place in the context of cooperative efforts to achieve common regulatory goals. Expert regulators and financial policy officials dominated decision making and resisted the intrusion of non-economic foreign policy goals. States and policymakers generally respected the neutrality of international financial infrastructure and networks, expressed only muted concern for strategic vulnerabilities and other non-economic concerns (with the important exception of terrorist financing after 2001), and paid little attention to differences in political systems.Footnote ¹¹³ In all these respects, geopolitical conflict and the rise of geoeconomics point to a substantial shift by creating the conditions for interventions that contradict the regime's explicit and implicit premises. Thus, while the intrusion of politics into international financial governance is not new, the rise of geopolitical competition has the potential to transform the nature of the regime's politics.Footnote ¹¹⁴

A. Weaponizing Financial Interdependence

The most visible way in which international finance is being harnessed in the service of geopolitics is financial sanctions. In the past two decades, economic sanctions have become vital tools of U.S. and European foreign policy, and many of these sanctions target finance. In response to Iran's nuclear program, the United States sanctioned the country's banks, cutting them off from U.S. dollar payments and freezing their assets.Footnote ¹¹⁶ It also threatened third-country banks with secondary sanctions if they continued dealing with Iran. The EU excluded Iranian banks from SWIFT, the premier global interbank messaging service.Footnote ¹¹⁷ Russia's annexation of Crimea and its later full-scale invasion of Ukraine prompted unprecedented expansion of financial sanctions. The United States, Europe, and their allies froze Russian assets, including much of Russia's central bank reserves. They targeted Russian banks by excluding them from SWIFT, cutting off their access to correspondent accounts, and, in some cases, imposing full blocking sanctions. They also banned many new investments in Russia and restricted offerings and trading of securities of sanctioned Russian entities.Footnote ¹¹⁸

The ability of leading financial jurisdictions, primarily the United States and Europe, to enforce financial sanctions relies not only on the importance of their markets but, more uniquely, on their authority over critical components of the international financial infrastructure. Financial sanctions are thus a core instance of “weaponized interdependence,” a pattern in which “states with political authority over the central nodes in the international networked structures through which money, goods, and information travel are uniquely positioned to impose costs on others.”Footnote ¹¹⁹ These states can leverage both “panopticon” and “chokepoint” effects, extracting information from the networks they control and threatening to exclude adversaries.Footnote ¹²⁰ Apart from network centrality and market size, these states also rely on exceptional levels of regulatory and enforcement capacity to make their sanctions effective.Footnote ¹²¹ In practice, the ability to weaponize financial interdependence to advance geopolitical goals is inherently restricted to very few states.

U.S. and European policies that weaponize the financial system are typically implemented by national security officials using national security tools, such as the U.S. International Emergency Economic Powers Act (IEEPA) and EU sanctions regulations. Nevertheless, these policies intersect with the IF regime in several ways, all of which potentially contradict its norms, principles, and decision-making procedures.

First, by their nature, financial sanctions depart from non-discrimination norms: because some nations are geopolitical adversaries, they are excluded from critical financial systems available to a nation's own firms and to its allies. Exclusion from these systems and other financial sanctions, such as asset freezes and prohibitions on specified transactions, also shut off cross-border trade and investment. Indeed, that is typically their ultimate objective: financial sanctions do not restrict financial flows for their own sake, but to affect the real economy and degrade an adversary's military capabilities. For example, U.S. financial sanctions impaired Iran's ability to export oil, discouraged third-party investment, and damaged its internal economy.Footnote ¹²² Financial sanctions thus also clash with the IF regime's orientation toward liberalization and market-based capital allocation.

Second, financial sanctions blur the line between financial regulation and national security, undermining the IF regime's principles of regulatory independence and technocratic management. Though the primary actors are national security officials, financial regulatory agencies also play a crucial role in implementing financial sanctions. Under U.S. law, banking regulators supervise banks’ anti-money laundering and sanctions programs to ensure their effectiveness, requiring banks to spend hundreds of billions of dollars in estimated compliance costs. These agencies and prosecutors routinely impose enormous fines to compel U.S. and foreign banks to apply U.S. sanctions, and sometimes mandate specific measures such as hiring more sanctions and anti-money laundering personnel, upgrading governance, and appointing independent monitors.Footnote ¹²³ In some cases, the commitments they extract go beyond legal obligations. In settling U.S. criminal charges, HSBC agreed to implement U.S. sanctions in all currencies and at all its worldwide affiliates, even where not formally required by U.S. sanctions laws.Footnote ¹²⁴ The European Central Bank, the central actor in Eurozone banking regulation, also played a crucial role in designing and implementing European sanctions on Russia.Footnote ¹²⁵

The fact that financial regulators have become deeply implicated in implementing financial sanctions should come as no surprise, because sanctions have increasingly become regulatory in intent and effect. Their aim is not just to create immediate carrots and sticks, but to regulate global finance to deter certain activities for security or geopolitical reasons. In Edoardo Saravalle's words, “sanctions measures are ultimately just financial regulations, ‘rules for where money can and cannot flow,’ except that in the case of sanctions the rules dictate that money should not go into Iran as opposed to dictating that money should not go to undercapitalized banks.”Footnote ¹²⁶ This blurring of the lines challenges the regime's technocratic orientation, which supposes a clear demarcation between financial regulatory goals—correcting market failures—and other objectives, such as national security, which fall outside the purview of financial regulators and their legal authorities. In doing so, it introduces a critical source of divergence between the interests of different national regulators, potentially undermining international cooperation mechanisms.Footnote ¹²⁷

At the same time, the weaponization of international finance challenges the principle of neutrality that transnational infrastructures, such as SWIFT and the global correspondent banking network, have traditionally observed.Footnote ¹²⁸ SWIFT may continue to insist that it is neutral, but its exclusion of Iranian and Russian banks under U.S. and EU pressure shows the world otherwise. Likewise, while global banks might prefer to serve customers everywhere regardless of their political differences, the threat of U.S. enforcement has forced them to abandon entire countries and regions and to implement U.S. sanctions across their global operations. The notion that international financial infrastructure is politically neutral, to the extent it ever prevailed, is dying, and with it any expectation that access to critical messaging, payments, and other systems will be based solely on traditional regulatory considerations—such as financial stability or crime control—rather than geopolitical ones.

Finally, weaponization of the global financial system motivates targets to reduce their exposure to interdependence. In a widely publicized 2016 speech, U.S. Treasury Secretary Jacob Lew warned that U.S. overuse of financial sanctions could threaten U.S. dollar dominance, echoing concerns voiced by many commentators.Footnote ¹²⁹ While the U.S. dollar remains by far the leading trade and reserve currency, financial sanctions have prompted targets to seek alternatives. In a recent book, Daniel McDowell shows that Russia and Turkey have strived to reduce their dependence on the dollar by shifting their central bank reserves to other currencies, buying gold, and encouraging non-dollar trade settlement.Footnote ¹³⁰ Potential competitors have deployed efforts to make their currencies more attractive.Footnote ¹³¹ China developed the Cross-Border Interbank Payment System (CIPS), a messaging, clearing and settlement system for international renminbi payments.Footnote ¹³² Although these efforts have only met with limited success, the proliferation of U.S. sanctions may contribute to de-dollarization.Footnote ¹³³ More generally, the weaponization of finance generates incentives for states to exit existing networks and to develop alternatives, fragmenting the international financial system and undermining the IF regime's premises.

B. Restricting Cross-Border Finance

As geopolitical tensions rise, states become more attuned to the vulnerabilities generated by interdependence and adopt measures to buttress their economic security. These measures include reducing reliance on the U.S. dollar and global payment systems, but there are many other ways in which financial openness may generate perceived security threats. In recent years, all three major economic and financial powers have adopted measures to restrict cross-border finance to protect security and geopolitical interests.

The most visible example is China, which has taken several steps to protect its security against perceived threats from the financial sector, reversing decades of reform. In the 1990s, as part of broader market-oriented economic reforms, the country began allowing foreign investors to invest in Chinese securities, listed several companies on foreign stock exchanges, and overhauled its banking system by injecting new capital, shedding non-performing loans, seeking partnerships with foreign firms, and listing bank shares through initial public offerings (IPOs).Footnote ¹³⁴ China also modernized its financial regulation system by creating professionalized agencies, the China Banking Regulatory Commission (CBRC) and China Securities Regulatory Commission (CSRC), which joined international standard-setting bodies and began implementing their standards.Footnote ¹³⁵ China also rejoined the IMF and the World Bank and joined the WTO, making significant commitments on market access for financial services.Footnote ¹³⁶ This approach, along with China's economic boom, succeeded in attracting large inflows of foreign capital.

Despite these reforms, China has long been attuned to the risks of financial openness, and carefully managed liberalization to control perceived vulnerabilities. At the macroeconomic level, the Asian financial crisis's impact on neighboring economies alerted China's leadership to the economic and sovereignty risks of capital flight, and generated policies aimed at accumulating large foreign exchange reserves and maintaining tight capital controls. The crisis also “led the CPC leadership for the first time to consider financial security a core element of China's national security.”Footnote ¹³⁷ As a result, leaders prioritized two objectives: “tightening financial regulations to strengthen financial security, and resisting foreign pressure to open up China's financial markets prematurely.”Footnote ¹³⁸ Thus, China has been keen to insulate strategic financial firms and markets from foreign influence: large state-controlled banks and securities firms continue to dominate these sectors, and state-owned enterprises (SOEs) continue to provide most listings on major Chinese stock markets.Footnote ¹³⁹ China also long prevented foreign credit cards and other payment processors from accessing its market, preferring homegrown networks like UnionPay.Footnote ¹⁴⁰ Incidents such as U.S. sanctions on Hong Kong officials and Huawei further pushed “the Chinese government [to try] to insulate itself from the global financial infrastructure.”Footnote ¹⁴¹

In recent years, the clash between financial openness and security concerns has intensified, as illustrated by a salient episode: the U.S.-China dispute concerning audits of Chinese firms listed on U.S. stock exchanges. In the 1990s and 2000s, many Chinese firms listed their shares on U.S. exchanges, including not only large SOEs and private companies, but also many smaller technology firms.Footnote ¹⁴² Under U.S. law, auditors that prepare financial statements for U.S.-listed firms are subject to oversight by the SEC and the U.S. Public Company Auditing Oversight Board (PCAOB), including periodic and “surprise” inspections, review of audit papers and other documents, and interviews with audit personnel.Footnote ¹⁴³ U.S.-listed foreign firms are deemed to consent to production of this information as part of their auditor's inspection.Footnote ¹⁴⁴ Many foreign regulators have concluded cooperation agreements under which PCAOB relies, in whole or in part, on local auditors and their regulation.Footnote ¹⁴⁵

China, by contrast, has taken a dim view of foreign inspections of Chinese auditing firms. While it has strived to develop a professional domestic auditing industry, its plans explicitly favored “those accounting firms . . . beneficial ‘to protecting the safety of national economic information,’”Footnote ¹⁴⁶ and it did not create a separate accounting oversight body like PCAOB.Footnote ¹⁴⁷ The Chinese government also resisted penetration of its market by the “Big Four” international auditing firms, adopting localization measures that limit the number of foreign partners in their local affiliates and require managing partners to be Chinese nationals.Footnote ¹⁴⁸ More to the point, the Chinese government also strictly limits cross-border information flows. Multiple, overlapping, and stringent Chinese laws limit access by PCAOB to audit documents, including a national security law that prohibits transferring any state secret—a broad and vague term that can be applied retroactively.Footnote ¹⁴⁹ Chinese law also prohibits foreign regulators from conducting inspections or investigations in China.Footnote ¹⁵⁰

These restrictions set the stage for a clash after a wave of accounting scandals hit smaller U.S.-listed Chinese companies in the early 2010s.Footnote ¹⁵¹ As the PCAOB ramped up its inspections of China-based auditors, they refused to cooperate, invoking Chinese secrecy laws.Footnote ¹⁵² In 2013, the PCAOB and Chinese authorities entered into a memorandum of understanding (MOU) intended to facilitate inspections, but PCAOB continued to face many obstacles and eventually concluded that the MOU was ineffective.Footnote ¹⁵³ As a result of this stalemate, the PCAOB and U.S. exchanges restricted new listings from non-cooperative jurisdictions, and in 2020, the U.S. Congress required U.S.-listed firms from non-cooperative jurisdictions to disclose government control and threatened them with delisting after three years.Footnote ¹⁵⁴ PCAOB soon made jurisdiction-wide findings that it was unable to inspect or investigate Chinese and Hong Kong firms, starting the countdown to mandatory delisting.Footnote ¹⁵⁵ These actions appear to have prompted progress: PCAOB and Chinese authorities concluded a new agreement in 2022, after which PCAOB successfully concluded trial inspections of two audit firms and rescinded its prior findings.Footnote ¹⁵⁶ Since then, PCAOB has investigated additional audit firms and imposed substantial penalties.Footnote ¹⁵⁷

Despite the apparent resolution of the PCAOB audit dispute, the more fundamental problem remains and will likely continue to fuel tensions. As Huang notes, “China's overall policy objective . . . has always been . . . maintaining national control on matters within its borders.”Footnote ¹⁵⁸ This objective has led to broad national security constraints on information flows, resistance to foreign oversight, and a new hostility to foreign exchange listings of important Chinese companies. Shortly after its 2021 NYSE IPO, ride-sharing firm DiDi was targeted by privacy enforcement actions that removed its app from all Chinese app stores; the company soon delisted from the New York Stock Exchange (NYSE).Footnote ¹⁵⁹ Alibaba, whose 2014 NYSE IPO was the world's largest at the time, was later targeted by investigations as its founder Jack Ma fell out of favor.Footnote ¹⁶⁰ In 2021, the government introduced restrictions on new foreign listings for companies in sensitive sectors,Footnote ¹⁶¹ and in 2022, five Chinese SOEs with a market capitalization of over $340 billion delisted from the NYSE.Footnote ¹⁶² The U.S.-China Economic and Security Review Commission (USCESRC) opined that “China's Ministry of Finance likely compelled these SOEs to delist to shield information deemed sensitive by the [Chinese Communist Party (CCP)] from U.S. regulators ahead of the framework agreement on audit inspections.”Footnote ¹⁶³

Even after these delistings, scholars fear that “there is a substantial likelihood that China will at some point refuse to fulfill [its audit access] commitments, at least in respect to certain firms . . . delisting will ensue and U.S. investors will be harmed.”Footnote ¹⁶⁴ Other foreign service providers in China that support cross-border finance have also been targeted. The government raided foreign due diligence and corporate advisory firms and detained employees, in moves interpreted as retaliation for U.S. export controls targeting China's semiconductors industry.Footnote ¹⁶⁵ China also adopted a new espionage law that “has alarmed foreign businesses because normal business activities could expose executives and employees at foreign firms to be marked as a spy.”Footnote ¹⁶⁶ Several of the world's largest corporate law firms have exited the Chinese market.Footnote ¹⁶⁷ The government has even reportedly cracked down on financial bloggers.Footnote ¹⁶⁸

Apart from these developments, broader manifestations of the decline of transparency and reversal of rule of law reforms raise concerns for foreign investors in China. According to researchers, millions of judgments have disappeared from Chinese online databases, reflecting the government's desire to restrict information on a range of issues.Footnote ¹⁶⁹ Recognition and enforcement in China of foreign judgments against foreign-listed Chinese companies for securities violations also encounter substantial obstacles, compromising the ability of foreign investors to enforce their rights through litigation.Footnote ¹⁷⁰ The Chinese government has also allegedly used cyberattacks to interfere with foreign acquisitions of domestic firms and sustain control over markets.Footnote ¹⁷¹ Overall, the picture that emerges is one of growing obstacles to cross-border finance, driven largely by national security concerns.

In contrast with China, the United States and Europe have long been champions of international financial integration, with essentially open capital accounts, large and liquid financial markets, and competitive financial institutions eager to expand across borders. Nevertheless, the rise of geopolitical competition has also prompted them to erect new barriers to financial flows. Western governments worry about China's strategy of using overseas acquisitions to acquire critical resources and technologies. In response to this “transacting” approach, the United States and Europe have adopted a defensive stance that includes “shielding,” that is, “protecting domestic technological knowledge from taking and transacting by a competitor.”Footnote ¹⁷²

The principal legal tool for this purpose has been stricter security-based controls on foreign direct investment. The United States has long exercised such control through the Committee on Foreign Investment in the United States (CFIUS), which can review and block inbound acquisitions on security grounds. In 2018, Congress expanded CFIUS's authority, and recently “CFIUS has substantially increased its scrutiny of filings, stepped up its compliance and enforcement monitoring and expanded its review of ‘non-notified’ transactions.”Footnote ¹⁷³ CFIUS review, which is “cloaked in secrecy,” has expanded to transactions with more tenuous links to national security and to indirect and non-controlling investments, a phenomenon that has been called “national security creep.”Footnote ¹⁷⁴

Europe, while traditionally less inclined to restrict inbound investment, has followed suit. At first, since Europe largely lacked formal investment control systems, these measures took the form of informal actions. Thus, in 2018, the German government used a state-owned bank to prevent Chinese takeover of an electricity distributor.Footnote ¹⁷⁵ But Europe is increasingly turning to formal investment review mechanisms. In 2019, the EU adopted a regulation to coordinate investment review, and by 2021, eighteen member states had adopted or expanded CFIUS-like screening procedures.Footnote ¹⁷⁶ According to researchers, the rise of CFIUS-like processes coincides with a substantial decrease in Chinese investments in the United States and Europe.Footnote ¹⁷⁷ The expansion of investment review is not limited to the United States or Europe. Indeed, the U.S. government actively promotes adoption of CFIUS-like processes, and several countries have moved ahead in recent years.Footnote ¹⁷⁸ The United Kingdom, Australia, Canada, Japan, and New Zealand have adopted similar models.Footnote ¹⁷⁹

The recent escalation of geopolitical tensions has also led the United States to adopt new and largely unprecedented restrictions on outbound investment and U.S. trading of foreign securities, as the country tries to impair industries seen as security threats. In 2021, the Trump administration issued an executive order that denounced the ability of Chinese military-linked companies to “raise capital by selling securities to United States investors that trade on public exchanges both here and abroad, lobbying United States index providers and funds to include these securities in market offerings, and engaging in other acts to ensure access to United States capital.”Footnote ¹⁸⁰ The executive order prohibited U.S. persons from transacting in publicly traded securities of identified Chinese military companies. In practice, it required U.S. investors to divest from several important Chinese communications and transportation companies.Footnote ¹⁸¹ The Biden administration expanded restrictions with executive orders targeting not only Chinese defense and surveillance firms, but also semiconductors, microelectronics, quantum technologies, and artificial intelligence.Footnote ¹⁸² Europe is also considering adopting outbound investment restrictions “for the first time in the Union's history.”Footnote ¹⁸³

Although these are the most explicit outbound investment restrictions imposed to date, other sanctions programs also restrict financial transactions. For example, sanctions on Russia include prohibitions on acquiring or trading in debt and equity securities of banks and other designated entities.Footnote ¹⁸⁴ Even outside the realm of sanctions, national security and geopolitical competition are making their way into debates on financial regulation. In a recent article on U.S. regulation of foreign banks, a scholar invokes national security concerns such as money laundering and sanctions evasion to argue that foreign banks should be required to form U.S. subsidiaries rather than continue operating through branches—even though that move would increase costs for foreign banks, reduce cross-border access to financial services, and possibly invite retaliation.Footnote ¹⁸⁵

In sum, efforts to restrict cross-border finance due to geopolitical concerns are on the rise, and they clash with the fundamental norms and principles of the IF regime. By their nature, these measures almost always discriminate—de jure or de facto—among foreign countries by targeting adversaries. They also often favor more secure domestic firms and networks over foreign providers. These manifest departures from non-discrimination norms underline the lack of binding obligations in international financial governance: unlike under the WTO regime, no legal recourse is available, even in theory. It also underlines the lack of any mechanism, such as an explicit security exception, to provide a framework for balancing security considerations against the system's basic norms. Apart from the limited market access obligations states may have under the GATS or other trade or investment agreements, the erection by states of new barriers to cross-border finance is largely unchecked.

Likewise, attempts to control information flows and limit foreign involvement in corporate governance based on geopolitical considerations also clash with the system's premises. A financial system based on liberalization, market-based capital allocation, and efficient incentives requires the generation and dissemination of information and the availability of governance opportunities and legal remedies to foreign firms and investors. These desiderata clash with states’ efforts to control financial information for security purposes. The rise of such measures—which include restrictions on access to audit papers, but also prohibitions on foreign control of sensitive information and data localization requirements—also create a wedge between authoritarian and democratic states, hindering liberalization and regulatory cooperation across different regime types.

C. Reorienting Financial Flows

Another potential geoeconomic use of finance consists of reorienting financial flows to promote geopolitical goals: attracting and strengthening political and military allies, developing or “reshoring” strategic industries and resources, and using finance as a bargaining chip in negotiations on other issues. As seen above, states have multiple tools to influence capital allocation and face growing calls to strengthen their economic security. It is thus unsurprising that all three of the world's major economies have, in different ways, incorporated geopolitical considerations into their management of the financial system.

In this area, China's practice has been most visible and salient, as it has pursued multiple initiatives to use its vast financial resources to advance geopolitical goals. Perhaps most striking is China's rapid expansion of its overseas lending. Recent research revealed that “China has become the world's largest official creditor, surpassing the outstanding claims of the World Bank, of the IMF, or of all 22 Paris Club governments combined.”Footnote ¹⁸⁶ More than four-fifths of developing and emerging countries had received Chinese official funding.Footnote ¹⁸⁷ The Export-Import Bank of China (Exim Bank) and China Development Bank (CDB) accounted for most of the lending.Footnote ¹⁸⁸ Many Chinese official loans contain unusual and onerous terms, such as strict confidentiality obligations, pledges of revenues, and constraints on Paris Club restructurings. Several contracts also feature “novel terms . . . [that] can amplify the lender's influence over the debtor's economic and foreign policies,” such as cross-defaults triggered by termination of diplomatic relations with China or other actions against Chinese interests, and protections against broadly defined policy changes by the debtor.Footnote ¹⁸⁹

In addition to bolstering official lending through CDB and Exim Bank, the Chinese government has also transferred hundreds of billions of dollars from its foreign exchange reserves to new entities such as the China Investment Corporation (CIC), the Silk Road Fund, and several new funds affiliated with the State Administration of Foreign Exchange (SAFE), which “have become essential tools of China's economic statecraft.”Footnote ¹⁹⁰ According to Zoe Zongyuan Liu, China's sovereign funds are its answer to U.S. dollar dominance—they “have transformed China's comparative advantage in international trade into strategic investments that have grown China's national competitive advantage and geoeconomic capacity.”Footnote ¹⁹¹ Their “shared mission . . . is to serve the state's prioritized agenda: first, ensure domestic financial stability; second, develop China's industrial capacity by securing essential resources and technology; and third, increase China's long-term global capacity to respond to geopolitical conflict with geoeconomic reprisals.”Footnote ¹⁹²

In some cases, China has reportedly used financial incentives as direct quid pro quo for political advantage, such as support for its positions on Taiwan's status or on maritime disputes in the South China Sea.Footnote ¹⁹³ Because such overt actions raised criticism and undermined the funds’ market credibility, China has become more cautious to avoid “crass geoeconomic power plays.”Footnote ¹⁹⁴ Nevertheless, according to Liu, its sovereign wealth funds serve multiple geopolitical goals. They fund overseas acquisitions of critical natural resources and technologies and help Chinese companies fend off foreign takeover attempts.Footnote ¹⁹⁵ They also provide crucial financing for the Belt and Road Initiative (BRI), “President Xi's signature project . . . widely viewed as aiming to project Beijing's influence across the Eurasia continent and reduce China's vulnerability to global strategic chokepoints . . . dominated by the United States.”Footnote ¹⁹⁶ They help promote internationalization of the renminbi.Footnote ¹⁹⁷ They also exercise more subtle influence, acting as “noncoercive means for the state to advance its strategic interests . . . by establishing connections to influential foreign actors and gaining access to global networks of sophisticated investors and political elites [and by] participat[ing] in multilateral institutions that sets standards for global financial governance.”Footnote ¹⁹⁸ China appears willing to tolerate below-market returns on these assets because of the offsetting geopolitical benefits.Footnote ¹⁹⁹

China's interventions in international finance are not limited to overseas lending and investment. Chinese law and practice provide multiple mechanisms by which the Party-state can direct the actions of market participants, including social responsibility obligations, board appointments, firm-level Party committees, ideological messaging, and legal and Party discipline.Footnote ²⁰⁰ China's state-owned banks, though ostensibly managed on market-based principles, have served as conduits for loans to finance natural resources projects and corporate expansion overseas, and continue to give preferential loans to strategically important SOEs.Footnote ²⁰¹ China's efforts to develop its securities markets also has a geopolitical dimension, as the country deploys both sticks and carrots to “lure its major entrepreneurial tech companies with overseas listings to its domestic market.”Footnote ²⁰² Dagong, China's leading credit rating agency, was criticized for geopolitical bias, favoring key Chinese allies or suppliers and downgrading U.S. allies. It failed in its attempt to gain international recognition and after a wave of domestic bond defaults, the state penalized Dagong and eventually took it over.Footnote ²⁰³

In the past decade, China's Party-state has further blurred the line between regulation and politics. The most salient episode was the stock market crash of 2015, during which a “national team” of institutional investors intervened to stabilize the market by buying massive amounts of shares.Footnote ²⁰⁴ Strikingly, financial regulatory agencies took an active part in this effort to uphold the government's promise to set a floor on market prices. The CSRC suspended all IPOs, prohibited large shareholders from selling stock for six months, allowed investors to borrow against their homes to buy stocks, encouraged large brokerages to buy stocks, and collaborated with the police to investigate “malicious short selling.”Footnote ²⁰⁵ The CBRC authorized banks to extend margin loans and Central Huijin, the fund that owns the state's stakes in China's largest banks, intervened to support their share prices.Footnote ²⁰⁶ The government also expanded the powers of local government pension funds to invest in stocks.Footnote ²⁰⁷

More recently, China's leadership has further systematized these efforts to assert political control over the country's financial system. In 2023, it created a powerful, Party-led Central Financial Commission to oversee financial regulation and merged banking, insurance, and some securities regulation into a new “super-regulator,” effectively marginalizing the traditionally “reformist and modernizing” People's Bank of China and the CSRC.Footnote ²⁰⁸ These moves were accompanied by a broad ideological statement that “made clear that [the Party] expected banks, pension funds, insurers and other financial organizations . . . to follow Marxist principles and pay obedience to Mr. Xi.”Footnote ²⁰⁹ To all appearances, China's approach to finance is moving away from Western-inspired technocratic model toward direct Party control, not just through regulation but through a full array of authoritarian tools, including Party discipline, surveillance, and arrests of both market participants and regulators, as well as direct state shareholdings in virtually all major banks and financial firms.Footnote ²¹⁰

Because of the United States’ longstanding commitment to market-based capital allocation, U.S. government efforts to direct financial flows to advance its geopolitical interests have historically been less salient. To be sure, the United States remains an important official lender, and financial aid is often tied to geopolitical considerations, but these channels are institutionally separate from the central bank and financial regulators and dwarfed by U.S private finance.Footnote ²¹¹ Nevertheless, recent research attracts attention to more subtle ways in which U.S. foreign policy influences how it allocates international financial stability support, especially through central bank swap lines. These arrangements are hardly novel: the Federal Reserve has periodically established bilateral swap lines with foreign central banks at least since the 1960s.Footnote ²¹² In 2007, they quickly reemerged as “the [Federal Open Market Committee (FOMC)] reestablished its swap lines and provided dollar liquidity on an unprecedented scale.”Footnote ²¹³ These facilities—which totaled $620 billion—allowed foreign central banks to support their banks as they faced severe U.S. dollar liquidity strains.Footnote ²¹⁴ Although some were later terminated, they were revived during the COVID-19 crisis.Footnote ²¹⁵

Since the global financial crisis, the Federal Reserve has thus taken on the role of “global lender-of-last-resort,”Footnote ²¹⁶ a critical source of global financial stability support.Footnote ²¹⁷ But U.S. dollar swap lines are not universally available: the Federal Reserve has extended them only to a select club of foreign central banks. During the financial crisis, it first granted swap lines to the European Central Bank and the Swiss National Bank, then expanded them to other advanced economies: Australia, Canada, Denmark, Japan, New Zealand, Norway, Sweden, and the United Kingdom.Footnote ²¹⁸ For the first time, it also extended swap lines to major emerging economies: Brazil, Mexico, Singapore, and South Korea (the “EME-4”).Footnote ²¹⁹ It reportedly declined requests from several countries, including India, Indonesia, and Turkey.Footnote ²²⁰ After the crisis, standing swap lines were restricted to a core of five central banks, but during the COVID-19 epidemic, the Federal Reserve reinstated support to the group of fourteen.Footnote ²²¹

This selectivity has raised the question of whether, and to what extent, geopolitical considerations play a role in the choice of swap line recipients. While the Federal Reserve “ha[s] substantial discretion over which central banks received a swap,”Footnote ²²² it maintains that its decisions are motivated by “global funding needs” and an array of economic factors, such as “the economic and financial mass of the country's economy, a record of sound economic management, and the probability that the swap line would make an economic difference.”Footnote ²²³ There is empirical support for the Federal Reserve's position: studies find that the grant of a swap line to a country during the crisis was predicted by greater dollar shortagesFootnote ²²⁴ and exposure of U.S. banks to that country's financial system.Footnote ²²⁵ This evidence is consistent with a technocratic view of the Fed's role as global lender of last resort.

However, there also is evidence that geopolitical concerns influence the Federal Reserve's choices. For instance, Aditi Sahasrabudde argues that “the FOMC's stated selection criteria do not adequately explain its choices.”Footnote ²²⁶ Brazil received a swap despite not meeting the Fed's economic management criteria, while India did not despite greater U.S. exposure to its financial system.Footnote ²²⁷ Sahasrabudde finds that the United States was more likely to extend swap lines to emerging economies that “shared its policy preference for greater financial openness” and to those that both had gained a greater voice in global economic governance through the G-20 and supported U.S. positions.Footnote ²²⁸ Other studies have found that U.S. military allies were more likely to receive COVID-19 swap linesFootnote ²²⁹ and that the extension of swap lines is correlated with ideological alignment with the United States.Footnote ²³⁰ Also looming in the background are broader geopolitical objectives associated with swap lines, such as sustaining U.S. dollar dominance and the advantages it confers.Footnote ²³¹

Europe, the world's other major economic power and another longstanding supporter of market-based international finance, is also turning its financial might to geopolitical ends. Over the past three decades, the European Union gradually integrated national financial systems into a single market in financial services, an effort that accelerated after the subprime and euro crises.Footnote ²³² Today, Europe has largely caught up with its rivals in financial regulatory capacity, with Union-wide regulation of banking, securities, investment funds, and insurance.Footnote ²³³ The euro is also the second most widely held reserve currency, and Europe is home to some of the world's largest and most globalized financial institutions. It thus has considerable clout in international finance.

Historically, Europe's practice has been to separate economic and geopolitical issues, using its global influence to set the rules for international trade and finance in ways that served its economic interests—a phenomenon that has become known as the “Brussels Effect.”Footnote ²³⁴ In recent years, however, the EU's approach has shifted toward “increasing . . . geoeconomic use of the single market for financial services.”Footnote ²³⁵ As seen above, increasing EU regulatory capacity was key to Europe's adoption and implementation of sanctions against Russia following its invasion of Ukraine.Footnote ²³⁶ Without doubt, this episode was the most striking instance where “the EU purposefully deployed its Single Market in financial services for foreign policy (security-related) purposes.”Footnote ²³⁷ EU sanctions drew on its authority over banking, capital markets, insurance, and even cryptocurrencies.Footnote ²³⁸ It also blocked Russian Central Bank assets worth € 210 billion.Footnote ²³⁹

Europe's geopolitical use of finance goes beyond sanctions. Increasingly, the EU uses access to its financial markets as a tool to advance non-economic objectives. A key component of Europe's arsenal is equivalence clauses, provisions in several post-crisis EU financial regulations under which foreign firms can gain market access if the EC determines that “the third country's regulatory and supervisory framework delivers equivalent outcomes as compared to the relevant EU framework.”Footnote ²⁴⁰ On their face, equivalence determinations pursue traditional regulatory goals: the EU describes them as “a regulatory instrument . . . which aims to deliver prudential benefits to market participants and to preserve the EU financial stability, market integrity, investor protection, and a level-playing field in the EU single market.”Footnote ²⁴¹ Equivalence clauses “encourage third countries to change their domestic rules so as to make them equivalent to EU rules,”Footnote ²⁴² consistent with the Brussels effect.

Because the EC has considerable discretion in making equivalence determinations, however, these can also be turned to geopolitical ends.Footnote ²⁴³ According to British observers, this is what transpired during negotiations over financial market access for UK firms after Brexit. As a non-member state, the United Kingdom would lose the benefit of intra-EU passporting for banks, securities firms, and many other financial services providers, and sought an alternative. The stakes were high: the “financial services sector is of vital importance to the UK economy as a whole, employing 2.3 million people and making up 10% of total UK tax receipts,” and Europe accounts for 37 percent of its exports.Footnote ²⁴⁴ The EU, however, insisted that “the four freedoms were indivisible and that there would not be a special deal for finance.”Footnote ²⁴⁵ If the UK left Europe and abandoned free movement of people, it could not “cherry-pick” free movement of capital, and would be treated as a third country under EU financial rules.Footnote ²⁴⁶

The United Kingdom thus found itself applying for EU equivalence decisions, which proved not to be forthcoming. A House of Lords report complained that the EU's approach was “political rather than technical and that the UK [was] being held to a higher standard than other countries.”Footnote ²⁴⁷ It pointed out that the United States, Switzerland, and Singapore, and several other countries benefited from multiple equivalence determinations, despite the UK regulatory regime being considerably more like Europe's given the country's past implementation of EU rules.Footnote ²⁴⁸ Lord Hill, a former EU commissioner in charge of equivalence determinations, commented: “I naively started off thinking there must be some kind of technical process . . . . Then you realise very quickly, of course, that it is just a political process and the answer fits the politics.”Footnote ²⁴⁹ The clear implication was that, at least in British eyes, the EU's denial of access was based on political goals extraneous to financial regulation.

European authorities have not denied that geopolitical goals may play a role in equivalence determinations.Footnote ²⁵⁰ To be sure, traditional regulatory goals, such as fears that the United Kingdom might deregulate finance to gain a competitive advantage, may have motivated the EU. Some European countries were also eager to entice London's firms to their financial centers, an economic objective.Footnote ²⁵¹ But geopolitical goals were also at stake. European leaders argued that the EU should not be dependent on a non-member state for critical financial services,Footnote ²⁵² a view linked with Europe's drive for economic security and “open strategic autonomy.”Footnote ²⁵³ The EU may also have sought to preserve a bargaining chip in broader negotiations. British observers blamed delays in concluding a regulatory MOU on financial services on “the dispute over the implementation of the Protocol on Ireland/Northern Ireland.”Footnote ²⁵⁴ The EU may also have been influenced by internal political conflict.Footnote ²⁵⁵ Even though market access would have been beneficial for many EU financial firms, they “were told not to campaign publicly for a special deal for finance,” underlining the primacy of political over economic interests and of relative over absolute gains.Footnote ²⁵⁶

In different forms and to different degrees, all three major financial powers thus have taken steps to shape international financial flows to advance geopolitical goals. By favoring certain nations over others as destinations for capital or financial services and by favoring domestic industries, these efforts clash with the IF regime's non-discrimination norms. Yet, not all these measures are necessarily perceived as breaching commitments to multilateralism and openness. Using a nation's own assets for geopolitical purposes, such as by channeling official lending to favored states or projects, is consistent with longstanding practice. Likewise, foreign investment screening tools like the United States’ CFIUS appear widely accepted. In other words, such tools may fall outside the IF regime's scope. Again, however, the clash with geoeconomics underlines the regime's lack of precise rules to define its scope of application, in contrast with the trade and investment regimes.

Moreover, where states use regulatory tools and agencies to achieve geopolitical goals, a direct clash arises with the IF regime's principle of expert regulation. As will be discussed below, introducing geopolitics into the financial regulatory process may undermine the informal governance structures on which the regime is based. In addition, regardless of the tools used, efforts to reshape financial flows for geopolitical ends conflict with the assumptions of market-based capital allocation and liberalization that underlie the regime. If done with moderation, the result may be no more than an episodic trade-off between economic efficiency and geopolitical aspirations. But as these measures proliferate, they raise the question whether a regime based on such premises can remain relevant in a world where practice shifts toward state-directed capital allocation in pursuit of geopolitical ends. In effect, measures to restrict financial flows for security reasons and to reorient them to pursue geopolitical goals contract both the domain of private international finance that expert regulators traditionally oversee and the policy choices available to them in exercising their authority.

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As this Part has shown, the return of geopolitics generates numerous tensions that threaten to distort or undermine the IF regime. These clashes have been less visible than in international trade and investment. Because the regime lacks legally binding general rules of behavior and a dispute resolution system, infringements of its norms and principles do not typically lead to litigation. By the same token, the IF regime's lack of an explicit security exception deprives it of a locus for debate on how security objectives should be balanced with the regime's core economic objectives.Footnote ²⁵⁷ The lack of a WTO-like reporting system for most restrictions that affect international finance, as well as the regime's informal and secretive nature, also limit transparency. But the clashes between geopolitics and international financial governance are no less real for being less visible.

A. International Regulatory Cooperation

As described in Part II, the IF regime relies primarily on informal arrangements and soft law norms. It contemplates consensus-based, technocratic cooperation among expert regulators to develop standards that are then implemented domestically by members. These standards advance common regulatory goals, such as financial stability, market integrity, customer and investor protection, crime control, and competition. The effectiveness of these arrangements rests on critical premises, which include the participants’ institutional independence, their relative insulation from politics, mutual trust, and free and candid exchange of information. The increasing role of geopolitics in international finance threatens these premises and therefore could undermine the regime's ability to sustain cooperation.

First, growing use of financial tools for geopolitical ends tends to curtail the independence of central banks and regulatory agencies and to shift their priorities. These institutions must now play a supporting role in achieving geopolitical goals set by the executive branch, and may have to do so at the expense of traditional regulatory mandates. In some cases, geopolitical imperatives may clash directly with conventional regulatory goals—consider, for instance, measures to encourage domestic banks to make risky loans to geopolitically favored partners (thus generating financial stability risks) or that generate domestic monopolies for inefficient but secure payment providers (thus impairing competition and efficiency).Footnote ²⁵⁸ As central banks and regulators turn away from common regulatory goals toward state-specific geopolitical objectives, the space for international cooperation shrinks. In addition, as the line between regulatory and geopolitical objectives becomes increasingly blurred, regulators may become suspicious of each other's motives. These developments may undermine the mutual trust essential for deliberating on common standards, communicating about market developments and concerns, and conducting effective peer review.Footnote ²⁵⁹

Growing geoeconomic interventions in international finance also underscore a reality that the IF regime has traditionally sought to downplay: vast disparities in power and resources among its participants. To be sure, important financial jurisdictions like the United States and Europe have long played a disproportionate role in shaping international financial governance. However, the regime's emphasis on multilateralism, consensus decision making, expertise, and common technical problems de-emphasized this reality and attracted a wide range of states to participate. As geopolitical objectives become more salient, so does some states’ greater capacity to impose their policies on others. They may do so within the regime, or by bypassing it altogether, exercising their power directly upon market participants or financial infrastructure. In turn, such actions may erode the incentives less powerful states have to participate in the regime and to concede some of their own preferences to achieve common goals.

At a more fundamental level, the shift by powerful states from an absolute-gains to a relative-gains logic in international economic relations undermines the cooperative rationale that underlies the IF regime. The regime aims at fostering orderly international finance to maximize the collective benefits of market-based capital allocation while minimizing the costs of market and regulatory failures. If its theoretical and factual premises are correct, all participants should benefit, though the gains may not be evenly distributed. But as states adopt a relative-gains logic, they may fear that their adversaries gain more from cooperation than themselves, undermining their motivation to participate. More generally, states may conclude that financial globalization itself, much like trade liberalization, has empowered their adversaries and should be reversed.Footnote ²⁶⁰ The more background norms of international economic relations shift toward economic nationalism, protectionism, security-based economic policies, and state-directed capital allocation, the smaller the role the IF regime can play.

To what extent has the return of geopolitics in fact compromised international cooperation? Because most international financial governance—such as standard-setting and peer review—takes place behind closed doors, the impact of geopolitics is difficult to substantiate comprehensively. But anecdotal evidence suggests that it is hindering cooperation. At the top, geopolitical tensions have nearly paralyzed the G-20, which is supposed to set the global regulatory agenda.Footnote ²⁶¹ Attention to regulatory issues like financial stability and consumer protection has waned considerably, and the post-crisis flood of initiatives has slowed to a trickle. The FSB's agenda now largely focuses on studying emerging issues such as artificial intelligence, climate-related disclosures, and asset tokenization, rather than adopting new standards.Footnote ²⁶² The impact of geopolitical competition hits at a time when the global regulatory agenda was already slowing down. For instance, strong political opposition in the United States to the “Basel III Endgame” has led to its postponement, which led the EU in turn to delay implementation to avoid putting its banks at a competitive disadvantage.Footnote ²⁶³

Beyond affecting the rulemaking and implementation agenda, geopolitical competition may threaten another core function of the IF regime: crisis management. Because financial crises tend to escalate quickly and unpredictably and to cross national boundaries, managing them requires international cooperation. Without it, interventions by officials in one jurisdiction may complicate others’ efforts, accelerate the crisis's international spread, and increase its overall economic and social costs. However, effective cooperation to manage financial crises is no easy task. Officials in affected states must be willing to share sensitive information, develop plans to act in concert, and trust others to refrain from acting opportunistically to shift the burden onto them. One of the IF regime's main benefits has historically been to cultivate ongoing relationships among the world's financial regulators—an environment of transparency, mutual trust and respect, and shared expertise—that would facilitate quick, decisive, and coordinated action when faced with emergencies.Footnote ²⁶⁴

Can this environment survive the return of geopolitics? As the IMF has warned, geopolitical conflicts—such as over Ukraine or Taiwan—can generate financial stability threats that require crisis planning and management by regulators.Footnote ²⁶⁵ It is hard to imagine governments cooperating effectively across geopolitical divides in such circumstances. Even short of open conflict, geopolitical tensions may undermine the regime's ability to handle crises. As noted above, the U.S. Federal Reserve plays a critical role as global lender of last resort, sustaining global financial stability via its central bank U.S. dollar swap lines. But if their allocation is dictated by geopolitics, will dollars be available to contain the next crisis? As one commentator put it, “[s]hould a country with sufficient economic mass and holdings of U.S. assets, but which was not a traditional U.S. ally, experience turmoil, how would U.S. policy respond?”Footnote ²⁶⁶ More generally, the trends described above—compromised independence, blurring of regulatory and foreign policy goals, and distrust between democracies and autocracies—tend to undermine the transparency and mutual trust essential for crisis management.

Geopolitical interference is not limited to multilateral regulatory cooperation bodies. The rise of China as the world's largest official creditor, and its insistence to exclude its claims from established restructuring processes like the Paris Club, are complicating debt relief efforts. Some commentators fear that this development understates the debt burden of highly indebted countries and the frequency and scale of distress, and may undermine the—already fragile—restructuring process that has emerged in recent decades under the auspices of the IMF, the Paris Club, and bondholder committees.Footnote ²⁶⁷ After Russia's invasion of Ukraine, the Financial Action Task Force (FATF), the world's anti-money laundering cooperation body, suspended Russia's membership, underlining the tension between regulatory cooperation and geopolitics.Footnote ²⁶⁸ Geopolitical tensions also interfere with bilateral cooperation between regulators: although China would prefer a system in which the United States defers to Chinese audit oversight, “these concessions will need a level of mutual trust and understanding between the two sides, which it is now seriously short of.”Footnote ²⁶⁹

Ultimately, an international regime is defined by its central objective of fostering policy coordination to achieve common goals. Despite geopolitical tensions, many areas remain in which collective action to regulate finance can generate joint benefits, some of which may be critical global public goods. The traditional goals of financial regulation—protecting financial stability, combating fraud and market manipulation, protecting investors and customers, combating tax evasion and money laundering, and preserving competition in the financial sector—all require coordinated global efforts. The same is true of newer policy concerns that implicate finance, such as managing climate change, cryptoassets, or artificial intelligence. The crucial question will be whether, and to what extent, collective governance in pursuit of these goals can coexist with geopolitical tensions and growing geoeconomic use of international finance. Though this question cannot answered uniformly across the IF regime, the rise of geopolitics provides ample reason to fear a decline in international cooperation even in respect of critical and widely-shared policy objectives. In the worst-case scenario—such as a global financial crisis—the consequences could be disastrous.

B. The IF Regime's Structure and Scope

Beyond its impact on cooperation within the regime, another important question is whether and how the rise of geopolitical competition will affect the regime's fundamental features. How can the regime's decision-making procedures, norms, and principles adapt to an age of geoeconomics? Will the changes be so deep as to amount to a change of regime, or will these fundamental features endure?

One possibility is that the regime could undergo radical change. The new reality of weaponization, security-based barriers to financial flows, and state-led capital allocation could become so dominant that the IF regime collapses or is reduced to practical irrelevance. In that world, the logic of zero-sum competition would displace the pursuit of joint gains to such an extent that global cooperation in finance would become negligible. This could happen because of military conflict among great powers. In this scenario, the IF regime would go into permanent or temporary eclipse, its revival dependent on geopolitical developments external to international finance and its regulation.

In the absence of open conflict, another—perhaps more likely—pattern of change would consist of regime weakening, fragmentation, and complexification. In this pattern, the trends identified above weaken the regime. The scope of feasible cooperation shrinks, so that fewer standards are adopted or updated. Those standards states do agree upon become easier to bend or ignore, especially by powerful states pursuing geopolitical goals. The regime's multilateral decision-making fora, not only specialized standard-setters but especially global coordinating bodies like the G-20 and the FSB, become less active and relevant. Cooperation shifts to regional or alliance-based bodies, where like-minded members pursue policies that further blur the lines between finance and geopolitics. When China created the Asian Infrastructure Investment Bank, there was much talk of the rise of an alternative Chinese international financial architecture.Footnote ²⁷⁰ Though these concerns may have been premature, fragmentation may accelerate as China, Russia, and other rivals now strive to create alternative institutions and infrastructure. Western states, for their part, may retreat to sympathetic forums such as the G-7, the OECD, and the FATF, and attempt to reassert the relevance of the IMF and World Bank.

In that scenario, the regime both fragments and complexifies: existing bodies continue to function and follow the same principles and norms, but states supplement them with alternative arrangements geared to pursue geopolitical ends. The result may be that international financial governance disaggregates from a unitary regime to a “regime complex” comprised of rival institutions, without clear hierarchical relationships, which compete to shape international financial policies.Footnote ²⁷¹ Because the complex's cleavages would be founded on rivalry among geopolitical groups of states, multilateral bodies would likely play a much reduced role. What continuing influence global bodies would exercise is difficult to predict, but it would depend on how powerful states balance geopolitical goals and financial regulatory cooperation—a trade-off that might shift over time. The regime's ability to achieve common goals on a global level, such as financial stability and climate change mitigation, would be substantially impaired.

Another, somewhat more optimistic scenario, is that the IF regime might “muddle through” the rise of geopolitics, adapting to accommodate states’ greater resort to geoeconomics while pursuing the regime's essential objectives.Footnote ²⁷² In some respects, the regime may be better equipped for resilience to geopolitical competition than the trade and investment regimes. After all, flexibility has long been among the most heralded features of the regime's soft law approach to international cooperation. As Brummer notes, “[b]y adopting informal rules of organization, participants retain the flexibility to convene quickly in order to create and reform institutions to meet new and unexpected challenges.”Footnote ²⁷³ Moreover, because participants are not legally bound by international standards and because these standards typically incorporate substantial flexibility, the regime may avoid the sort of open confrontation over breaches that has paralyzed the WTO system. This flexibility also means that, unlike in the investment regime, states can gain little by way of expanded policy autonomy by withdrawing from established agreements or threatening to do so. The IF regime's secrecy and lack of formalized and public dispute resolution procedures may further allow participants to accommodate departures motivated by geopolitical factors while signaling informally where the limits lie.

In other words, the regime's distinctive institutional informality might facilitate the development of a modus vivendi in which participants balance greater pressure to advance geopolitical aims with the need to sustain cooperation to secure financial stability and other common regulatory objectives. If they succeed in doing so, the IF regime's soft law approach may emerge as an appealing, more robust alternative to deeper legalization in the trade and investment regimes. Instead of struggling with the arduous—perhaps impossible—task of crafting explicit, legalized security exceptions enforceable by third-party dispute settlement and with which members are willing to comply, the IF regime would rely on the numerous loci of flexibility and discretion afforded by its soft law standards and peer review mechanisms to accommodate the rise of geopolitics. In that way, the regime could endure and achieve some of its goals until geopolitical tensions ease.

A critical precondition for this scenario is a willingness on the part of powerful states to preserve at least some of the core institutional framework for financial regulation, such as the relative independence of financial regulatory agencies, expert staffing, and limited intervention by foreign policy officials in financial matters. Because the principle of expert regulation defines the regime, it cannot change radically without effectively shifting to a new regime. Even without displacing this core principle, however, the IF regime may change in significant ways. Implicit non-discrimination norms may be ignored to such an extent that they can no longer be considered part of the regime. The regime's ambitions and its actual reach may shrink to common regulatory goals that do not conflict with powerful states’ geopolitical goals. In this world, we would also likely observe more widespread non-compliance. The regime would become less relevant to outcomes such as cross-border capital allocation, which would be reshaped by unilateral state action. Risks to financial stability and other common regulatory goals would also be more likely to emerge unchecked.

In this respect, a significant and worrisome concern relates to the regime's effective scope. As a consequence of greater geoeconomic interventions, international finance may migrate out of visible and regulated spaces to increasingly opaque and untamed ones, outside the international regulatory perimeter.Footnote ²⁷⁴ Examples of this phenomenon already abound. For instance, recent scholarship shows how financial sanctions have diverted bank flows and deposits out of established financial centers toward tax havens and secrecy jurisdictions, even for non-target states.Footnote ²⁷⁵ Because these jurisdictions are less transparent, have fewer regulatory resources, and may not follow international standards, this shift may threaten financial stability and other common regulatory goals.

Likewise, the weaponization of financial infrastructure has motivated states to shift their assets and activities to less transparent messaging and payments systems that may not abide by international standards meant to protect financial stability or prevent money laundering.Footnote ²⁷⁶ As part of efforts to impose a price cap on Russian oil exports, Western nations have prohibited insurers from covering ships that transport oil at a price above the cap. Instead, operators of Russia's growing “shadow fleet” have turned to a Russian insurer that may be unwilling or unable to cover the environmental damage of a major oil spill.Footnote ²⁷⁷ The rise of non-transparent Chinese lending has made it harder to measure the debt burden of developing countries and to assess the risks embedded in lending contracts, and may complicate crisis management.Footnote ²⁷⁸ As was the case with the U.S. “shadow banking system” before the global financial crisis, the growth of a “shadow international financial system” means that significant risks to financial stability and other common regulatory goals might grow unchecked.

C. Global Economic and Security Implications

The rise of geopolitics is reshaping international financial governance in ways that favor fragmentation of the international financial system. For example, swap lines, equivalence determinations, and investment prohibitions encourage financial flows and services to shift away from geopolitical adversaries toward partners. As powerful states weaponize financial interdependence and redirect financial flows to advance geopolitical ends, the cumulative impact is to fragment international finance along geopolitical lines. In addition, market participants, aware of growing geopolitical risks, may increasingly choose to prioritize safer financial relationships. That trend is already apparent in trade, as trade flows are reshaped along “geopolitical ‘blocs.’”Footnote ²⁷⁹ Likewise, foreign direct investment is increasingly correlated with measures of geopolitical alignment among nations.Footnote ²⁸⁰ For portfolio investment, which accounts for most of international capital flows, a similar trend can be expected. Thus, the IMF's 2023 World Economic Outlook reports that, after 2001, advanced economies’ portfolio exposures to ideologically distant countries grew steadily, suggesting that “a rise in political tensions could trigger a significant reallocation of capital at the global level.”Footnote ²⁸¹

What implications does the fragmentation of international finance have for economic welfare and international security? Perhaps surprisingly, the economic consequences are uncertain. In theory, reallocation of capital flows along geopolitical lines should harm economic welfare, as it undermines the international financial system's conventional economic function to channel savings to their most efficient uses. Likewise, restrictions on cross-border financial services and geopolitical preferences should also harm welfare by preventing competition by efficient foreign providers. Fragmentation of the international financial infrastructure also threatens to destroy economies generated by global networks such as SWIFT and U.S. dollar correspondent banking. If these conjectures are correct, the consequences of fragmentation would be slower economic growth and lower aggregate welfare.Footnote ²⁸²

However, this assessment is complicated by theoretical and empirical uncertainty regarding the welfare effects of international capital flows. There is evidence that foreign direct investment flows enhance economic growth, mostly through indirect effects like technology transfers, increased competition, and greater demand for local suppliers.Footnote ²⁸³ Thus, the IMF estimates that FDI fragmentation could reduce global output by two percent, with the impact concentrated in emerging and developing economies.Footnote ²⁸⁴ For portfolio investment, by contrast, the evidence is more ambiguous. International capital flows have both benefits and costs, the latter of which include an increased likelihood of financial crises, especially if liberalization occurs without domestic institutional preconditions.Footnote ²⁸⁵ Some studies also associate capital account liberalization with negative outcomes such as greater domestic inequality.Footnote ²⁸⁶ Thus, the welfare impact of financial fragmentation is more difficult to predict. However, state measures motivated by geopolitical ends are unlikely to be well-suited to address the economic costs of liberalization, such as instability, inequality, and regulatory failures—indeed, they seem at least as likely to worsen them. Financial fragmentation's economic impact is likely to be negative.

Apart from its economic impact, financial fragmentation along geopolitical lines also has security implications. At first glance, these implications might appear positive. After all, the typical goal of geoeconomic interventions is to trade off some efficiency to increase a state's economic security. But reality is likely to be more complex. Financial fragmentation may turn out to be a race to the bottom, as each state seeks to improve its security at others’ expense, leaving all states worse off. More specifically, there are at least two channels through which financial fragmentation can undermine security. First, individual nations may find their security threatened by lack of access to international finance. For example, they may be unable to raise funds to respond to crises or natural disasters, or they may become overly dependent for capital on powerful partners within their bloc. Second, isolated and rival financial and trade blocs may be more likely to go to war. After all, the experience of the 1930s loomed large in the minds of the Bretton Woods negotiators, and even today, the WTO argues that “[f]ragmentation tends to reduce security and increase the likelihood of conflict.”Footnote ²⁸⁷