Navigating the Financial Stability Risks of Inequality, Polarization, and Eroding Trust

Why social fragmentation is now a core macro-financial risk—and how policymakers and markets can respond.

Inequality, political polarization, and declining trust aren’t just social issues—they’re financial-stability risks that shape fiscal space, market resilience, and institutional credibility. Our new deep-dive report maps the channels from social fragmentation to fiscal stress, banking and capital-market fragility, and regulatory breakdown; reviews historical precedents; assesses today’s data; and lays out scenarios and policy options. Designed for finance ministries, central banks, regulators, multilaterals, and institutional investors, the report offers a practical framework to incorporate social-risk diagnostics into surveillance, stress testing, and strategy.

Key takeaways:

•⁠ ⁠Social fragmentation is a systemic driver of financial risk—not background noise.

•⁠ ⁠Transmission runs through fiscal anchors, market confidence, and institutional credibility.

•⁠ ⁠Three scenarios: Baseline erosion, Fragmentation shock, Resilience and reform.

•⁠ ⁠Policy levers: inclusive fiscal design, macroprudential buffers/market design, trust-building institutions.

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Navigating the Financial Stability Risks of Inequality, Polarization, and Eroding Trust