Geneva 29: CHANGING STRUCTURE AND CHALLENGES OF THE INTERNATIONAL FINANCIAL SYSTEM

Geneva Report launch:

Changing Structure and Challenges

of the International Financial System

​

Peterson Institute for International Economics, September 30, 2026

​

Valentina Bruno -- American University, CEPR, ECGI, and NBER

Steven Kamin -- American Enterprise Institute

Cédric Tille -- Graduate Institute of International and Development Studies and CEPR

Angel Ubide -- Citadel

Geneva 29: CHANGING STRUCTURE AND CHALLENGES OF THE INTERNATIONAL FINANCIAL SYSTEM

Geneva Reports on the World Economy 29

Changing Structure and Challenges of the International Financial System: Imbalances, Currencies, and Financial Stability

Chapter 1: Global Imbalances

Widening, but is it that bad?

• Sum of absolute values of current account (left), or net positions (right).
• Flows: increase since 2020, but remain below the 2007 peak.
• Even when adjusting for data issues in USA and China.
• Stocks: steady increase, changing composition.
• Debt and reserves until 2008, FDI and equity since (valuation effects).

Not really global

• Imbalances driven by China, USA, Euro area.
• For flow and stock measures.
• Rising China’s surplus, but not unusual compared to domestic GDP (top).
• Even if surplus in goods in underestimated.
• China has become larger, the USA smaller.
• Relative to world GDP, Chinese surplus is very high compared to the past.
• Context of low domestic demand (housing bust) and high supply (industrial policy).
• «China shock 2.0», in more advanced sectors than in the past.

Is it worrisome? It depends on focus

• Standard international macroeconomics view.
• Fundamentals: heterogenous ageing, investment leading to productivity.
• Ability to issue financial assets (export of financial service)..
• «Beggar-thy-neighbor» : China takes demand from the rest of the world…
• …but provides cheap imports.
• Some policies can be questionable, but primarly domestically (fiscal deficit, lack of household safety net).
• Macroeconomics + concentration & speed view.
• Employment costs concentrated in regions and sectors.
• Rapid / large change hinders ability to reallocate absorb.

Finance view

• Macroeconomics + financial stability view.
• Shift to contingent assets improves risk sharing. Beware of leverage.
• High gross capital flows fuel inefficient credit → risk of subsequent sudden stop crises. Applicable to euro crisis, but not GFC.
• Global financial cycle, with surges and sudden stops.
• Inefficiency if externality leads to excessive borrowing.
• Broad toolkit to handle volatile capital flows (IPF, sequencing).

New elements

• Macroeconomics + industrial policy view.
• (Macro) industrial policy, demand restrictions (e.g. FX reserves, IMF 2026).
• Smaller traded sector in deficit countries → hinders innovation..
• Macroeconomics + geopolitics (resilience) view.
• Reliable domestic supply of strategic goods.
• Political dynamics: disruptions raise risk of political radicalisation.
• Accent on China: larger size amplifies the spillovers.
• The rest-of-the-world cannot easily absorb spillovers.

Which policies should we adopt?

• First best: global policy coordination (US fiscal gap, Chinese consumption).
• Fine, but is it realistic? Effect from mostly from China.
• Countries don’t adopt domestically beneficial policies on their own, can global motivation really help?
• Domestic policies, as several elements are not about imbalances.
• Antitrust and competition policy (reduce dividends paid abroad).
• Pressure on innovation → promote R&D (clusters, taxation of new firms).
• Resilience for strategic goods → subsidy, even nationalization, of the sectors.
• Disruptive reallocation → retraining, stabilize income distribution (taxation, bargaining power).
• Tariffs maybe to smooth the cost, but limited effect (IMF 2026).
• Capital flows volatility (gross) → macroprudential policy.

Geneva 29: CHANGING STRUCTURE AND CHALLENGES OF THE INTERNATIONAL FINANCIAL SYSTEM

Geneva Reports on the World Economy 29

Changing Structure and Challenges of the International Financial System: Imbalances, Currencies, and Financial Stability

Chapter 2: The Future of Global Currency Dominance

10

​

1. The dollar remains número uno.

​

• Damage to the dollar from Liberation Day, and prospective effects of continued counterproductive US policies.

​

• Potential for replacement of the dollar by

​

• the euro
• the renminbi

​

• Scenarios for a more balanced multipolar world

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Outline of Chapter

11

​

​

​

​

​

​

​

​

​

​

1. Centrality of the dollar in the global financial system.

Despite all the buzz about abandoning the dollar, the dollar share of reserves has declined only slightly in recent years.

​

Currency Shares in International Reserve Holdings

12

And reserves are not the only measure of currency dominance.

​

Across all measures of currency use, the dollar punches above its weight in the global economy.

​

Dollar Shares in Global Financial Transactions

​

​

​

​

​

​

​

​

1. Centrality of the dollar in the global financial system.

13

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

1. Centrality of the dollar in the global financial system.

All told, composite measures of global dollar use continue to far exceed use of the euro and, especially, the renminbi.

Indexes of International Currency Usage

II. Liberation Day and its aftermath

14

II. Liberation Day and its aftermath

15

The combination of falling dollar and rising VIX after Liberation Day suggested that investors no longer viewed dollar assets as safe assets.

​

Fig 7. VIX Volatility Index and DXY Dollar Index

II. Liberation Day and its aftermath

16

The estimated sensitivity of the dollar to the VIX turned negative after Liberation Day, more like an emerging-market risk-on currency than a safe-haven currency.

Estimated sensitivity of the dollar to the VIX

II. Liberation Day and its aftermath

The dollar has reverted to its normal, positive sensitivity to financial volatility, but many policies could weaken dollar dominance if continued:

​

• Prolonged federal deficits and rising debts.

​

• Weakening of rule of law.

​

• Capricious economic policies.

​

• Attacks on the Federal Reserve.

​

• Actions that weaken bonds of cooperation with our allies.

​

17

III. Prospects for an expanded international roles of the euro and renminbi.�

New impetus to long-standing desires of Europe and China to challenge dollar supremacy.

​

• Counterproductive and belligerent US policies reinforce desire to reduce dependence on the dollar.

​

• US policies offer new opportunities for competitor currencies to expand global reach.

​

• Countries targeted by sanctions (Russia, Iran) shifting to renminbi to avoid using dollars.

18

III.a Prospects for an expanded international role of the euro�

Factors limiting global use of the euro:

​

• Limited supply of European super-safe assets like EU bonds.

​

• Lack of comprehensive fiscal union.

​

• Fragmentation of European private financial markets.

​

• Lower growth rate of European economy.

​

• Failure to develop independent military/diplomatic alliances.

​

​

​

​

​

19

III.a Prospects for an expanded international role of the euro�

Initiatives to address limiting factors:

​

• Renewed push for more Eurobond issuance (Blanchard and Ubide, 2025).

​

• Renewed push to remove barriers to Single Market and complete Banking and Capital Markets Union.

​

• ECB offers euro swap lines beyond Europe.

​

• Expanding trade agreements (Mercosur, India).

​

• ECB has received provisional “green light” for digital euro.

​

​

​

​

20

III.a Prospects for an expanded international role of the euro�

• Unclear how much policy reform will actually be implemented.

​

• Unclear how much impact policy reform will have on actual currency use around the world.

​

​

​

​

21

22

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

III.b The expanding global role of the RMB

23

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

III.b The expanding global role of the RMB

The renminbi punches well below its weight in the global economy.

​

​

Renminbi Shares in International Financial Transactions

24

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

III.b The expanding global role of the RMB

Factors limiting global use of the RMB:

• Capital controls.
• Concerns about reliability/credibility of Chinese government and rule of law.
• Opacity of China’s financial system.

“The real obstacle to the internationalization of the renminbi may be less the absence of the rule of law and more the absence of the rule of accounting. But accounting probity is exactly what the renminbi needs to even come close to the euro’s level of internationalization.” (Financial Times, 2026)

​

​

25

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

III.b The expanding global role of the RMB

Initiatives undertaken by Chinese government to promote global use of the RMB:

​

• Shanghai-Hong Kong Stock Connect Program (2014), Shenzen-Hong Kong Stock Connect Program (2016), etc. to provide more outside access to Chinese equity and debt markets.

​

• Network of offshore clearing banks to clear and settle renminbi payments, facilitate use of renminbi by foreigners outside China.

​

• Cross-Border Interbank Payment System (CIPS) to clear renminbi cross-border payments; operates independently of dollar payment arrangements.

​

• Bilateral swap lines to 32 central banks or monetary authorities; mainly for trade facilitation, but some bailouts (Argentina, 2023).

​

​

26

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

III.b The expanding global role of the RMB

Von Beschwitz, Bastian. 2024. “Internationalization of the Chinese renminbi: progress and outlook,” Federal Reserve Board FEDS Notes, August.

​

Initiatives to boost use of RMB in trade will likely be successful.

​

Use of RMB in Chinese bilateral trade rising substantially.

​

​

​

Share of Chinese Trade Settled in Renminbi

27

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

III.b The expanding global role of the RMB

However, full internationalization of RMB for financial saving and transactions seems unlikely.

​

• Concerns about capital controls, concerns about Chinese government as counterparty, and opacity of Chinese financial system to limit full internationalization.

​

• Even for limited holdings of RMB for trade purposes, foreigners will want dollar backing to guarantee quick/efficient ability to liquidate RMB.

​

• Therefore, Eichengreen et al. argue China will continue to require large dollar stocks:

“The two reserve currencies would be complements, not substitutes. “

​

​

28

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

IV. Scenarios for a more balanced multipolar world

​

​

29

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

IV. Scenarios for a more balanced multipolar world

​

• Although the dollar is the world’s more prominent currency, we already live in a multipolar currency world.

​

• The international use of the euro and RMB is gaining ground, so the dominance of the dollar will likely be diminished in years to come.

​

• Under any but most extreme scenario, the dollar unlikely to be replaced by another currency. The most likely outcome under any scenario is a continued multipolar currency world, but a more evenly balanced one.

IV. Scenarios for a more balanced multipolar world

30

31

​

​

​

​

​

​

​

​

​

​

​

• Continued strong growth of trade and economic activity abroad.

​

• Reforms to support economic growth and financial integration in euro area.

​

• Progress to open China’s financial system, facilitate currency trading, and improve transparency and accountability.

​

• Active portfolio diversification by reserve managers.

​

• Improvements in payments technology may reduce the use of the dollar for transactions between non-U.S. economies.

​

IV. Scenarios for a more balanced multipolar world

32

​

​

​

​

​

​

​

​

​

​

IV. Scenarios for a more balanced multipolar world

​

• Geopolitical tensions lead to fragmentation of global trade and finance into U.S.- and China-led blocs.

​

• Shifts of reserves out of dollars to avoid sanctions.

​

• Aided by China’s aggressive encouragement of use of renminbi in international payments.

​

• Not just the good scenario with less dollar dominance.

​

• Global fragmentation leads to reduced efficiency, innovation, growth, and prosperity.

​

​

33

​

​

​

​

​

​

​

​

​

​

IV. Scenarios for a more balanced multipolar world

• U.S. budget deficits persist and debt mounts amid continued political polarization and dysfunction.

​

• Constraints on the Federal Reserve lead to rising inflation.

​

• The result is a crowding out of private investment, heightened financial volatility, and reduction in the dynamism of the US economy.

​

• The dollar loses its dominance, but with the world’s largest economy and financial system imploding, that’s nothing for the rest of the world to celebrate.

​

34

​

​

Thank you!

​

On to Chapter 3…

​

​

​

Geneva 29: CHANGING STRUCTURE AND CHALLENGES OF THE INTERNATIONAL FINANCIAL SYSTEM

Geneva Reports on the World Economy 29

Changing Structure and Challenges of the International Financial System: Imbalances, Currencies, and Financial Stability

Chapter 3: How Global Liquidity Evolved – and What It Means for Today’s Financial Stability

What is Global Liquidity?

The Poetic view ❤️

​

Liquidity is like love in many ways: invisible, hard to define, and impossible to measure.

​

What is Global Liquidity?

The Structural view ⚙️ It requires:

​

• An intermediary — whose balance sheet acts as the transmission channel; and
• A backstop — prepared to intervene when the vehicle falters.

​

The evolution of the global dollar system is, in large part, the story of shifts in the nature of intermediation.

​

Three eras of global dollar liquidity

1950s–1971

Offshore eurodollar system

1970s–2007

Global bank balance sheets

2008–present

Market-based system

Intermediary

London and European offshore banks

Global banks

Dealer banks at the centre, with hedge funds, MMFs, pension funds and insurers around them

Funding

Offshore dollar deposits

U.S. money market funds, interbank markets, repo

Collateralised market finance: repo, FX swaps, futures margin

Fragility

Bretton Woods strain

Wholesale rollover risk and gross flows

Dealer balance-sheet capacity may not support market liquidity in stress

→

→

Post-2008: The Treasury market became larger and more market-based

The shift to market-based finance also touches other currencies.

$31.8 trillion

1

Debt moved onto�sovereign balance sheets

Debt moved from private hands to public hands

2

Banks became�constrained

Post-crisis regulation reduced the role of bank balance sheets in direct intermediation

3

Nonbanks became�a growing transmission channel for global liquidity

→

→

The post GFC change was not just more public debt:

it was a new investor base and a more market-based form of intermediation.

Alongside traditional bank intermediation

Marketable U.S. Treasury debt, August 2026

Up from $4.5 trillion at end-2007 — a seven-fold increase

The Dealer-at-the-Centre view

Follow the money: two channels, one balance sheet.

Foreign pension funds

& insurers

local currency

FX swap

dollars

Money market

funds

dollar cash

Repo

dollars vs. Treasury

collateral

GLOBAL DEALER BANK

Balance sheet

FX swap channel

Foreign pension funds and insurers hedge their dollar assets with FX swaps; dealer banks are the counterparty.

→ Synthetic dollar borrowing

​

Treasury repo / futures channel

Hedge funds run the basis trade on repo funded by money market funds; dealers sponsor the repo and stand in the middle.

→ Leveraged duration demand

Key implication: dislocations that look local are symptoms of shared plumbing — dealer balance-sheet capacity.

March 2020: strong dollar, both channels strained. April 2025: weak dollar, hedging channel only. Same plumbing, different pressure.

🏛️

The New Market-Based Trilemma

1. Ever-expanding Treasury supply

​

$4.5T → $31T (2007-2026)

2. Dealer balance-sheet constraints

​

Basel III SLR

leverage ratios

3. Always-steady markets

​

Orderly functioning in every state of the world

Choose 1 + 2 → give up 3

NBFIs fill the gap — but liquidity is conditional, not structural. Fed interventions needed in stress.

Choose 1 + 3 → give up 2

​

Loosen SLR — but risks of supercharging repo financed NBFI leverage.

Choose 2 + 3 → give up 1

​

Fiscal discipline.

Pick any two

The System Has Reconfigured, Not Retreated

What has changed

• Intermediation: banks → NBFIs + capital markets
• Dollar demand: via FX swaps + Treasury futures
• Fragility: concentrated balance sheets → layers of leveraged, market-based intermediation

What has not changed

• Dollar centrality (57% reserves, 89% FX trades)
• Backstop: still the Federal Reserve
• Dealer banks at the center of market functioning
• Absence of a credible safe-asset substitute

​

View the system as a linked dashboard — not FX swaps here, repo there, Treasuries elsewhere.

Geneva 29: CHANGING STRUCTURE AND CHALLENGES OF THE INTERNATIONAL FINANCIAL SYSTEM

Geneva Reports on the World Economy 29

Changing Structure and Challenges of the International Financial System: Imbalances, Currencies, and Financial Stability

Chapter 4: The Geopolitics of Imbalances: Size, Power Dynamics, and the Legacy of Past Crises

The geopolitics of global imbalances

• Size differences dictate global economic and financial dominance

​

• US debt is only global asset
• Stock of US Treasuries, in USD = 1.5 * combined debt of rest of G7

​

• China dominates global manufacturing
• Share of global manufacturing > sum of next 3 largest countries

​

• EU chose to be a group of small countries
• 27 fragmented markets

The geopolitics of global imbalances

• Power dynamics drive protectionist economic policies

​

• Weaponized interdependence and the boom in economic statecraft: tariffs, sanctions, subsidies, export and investment restrictions

​

• Chokepoint controls: supply chains, critical materials, and payment systems as economic leverage

​

• The revival of neo-mercantilism: focus on manufacturing and protectionism as a response to voters' economic insecurity

The geopolitics of global imbalances

• The legacy of past crises creates policy inertia
• Post 2008 bank regulatory tightening: constraints on dealer balance sheets shift debt absorption to NBFIs

​

• Euro crisis scars: entrenched mistrust across EU countries raises economic and financial fragmentation

​

• China’s 2015 capital account liberalization scare: retain capital controls and managed exchange rate to protect economic transition

​

• And different policy preferences
• US: large deficits to support aggregate demand and tech leadership

​

• China: large deficits to support investment and manufacturing dominance

​

• EU: small deficits to meet fiscal rules

The geopolitics of tariffs and exchange rates

• Tariffs have done little for imbalances

​

• US trade deficit remains very large
• Third country rerouting implies little change in US-China dependency
• Does China’s macro policy mix require an undervalued exchange rate?

​

• Deflationary burst of housing bubble, ELB, no fiscal space

​

• At time of rapid tech progress

​

=> “Reverse Dutch Disease”

​

• CNY appreciation as geopolitical tool

The geopolitics of financial stocks and flows

• USD: weaponization of payments and assets
• Promoting USD role – limited impact of stablecoins
• ROW developing alternative rails

​

• RMB: international currency, not reserve currency
• Promoting use in payments – avoid weaponization
• Very limited supply of Chinese bonds as reserve assets

​

• EUR: just a regional currency?
• Digital euro as a monetary sovereignty strategy – avoid weaponization
• Limited supply of safe assets despite better fiscal outlook
• => No exit from USD liquidity

The world in 2036

• Post weaponization equilibrium
• The quest for domestic resilience and self sufficiency

​

• Is a multipolar world with stronger EU and China more resilient?
• Politically comfortable equilibrium
• US and China Mutually Assured Disruption
• EU as a perpetual middle power

​

• The Fed as perpetual implicit backstop of US debt
• The new imbalances: the geoeconomics of AI
• Technology deficits

​

• Algorithmic weaponization