What is financial integration?
It's a phenomenon where financial markets in neighbouring, regional or global economies are closely linked together - for example, through cross-border capital flows, foreign participation in the domestic financial markets, and information sharing among financial institutions. Legal restrictions can sometimes hinder financial integration.
Key takeaways
Financial integration describes closely linked financial markets across neighbouring, regional or global economies through cross-border capital flows, foreign participation, and information sharing among institutions.
Integration can occur through formal treaties where governing bodies cooperate to address financial disturbances, though legal restrictions can sometimes hinder the integration process.
Recent financial crises have sparked lively academic debate about the costs and benefits of financial integration, with discussions examining both advantages and potential risks.
Key advantages of financial integration include better governance, more efficient capital allocation, and higher levels of growth and investment in participating economies.
A significant risk is that higher financial integration can potentially trigger severe financial contagion in linked economies during periods of financial crisis.
What you need to know about financial integration.
Financial integration of neighbouring, regional or global economies can take place through a formal treaty in which the governing bodies of those economies agree to cooperate to address financial disturbances. But because of the recent financial crises, there's been a lively debate among academics about the costs and benefits of financial integration.
The advantages of financial integration include better governance, efficient capital allocation and higher growth and investment. But, a higher degree of financial integration also has the potential to trigger severe financial contagion in linked economies during crises.