Definition
Financial integration is the process by which national financial markets become linked across borders — through cross-border banking, foreign equity and bond holdings, international portfolio flows, foreign direct investment, and synchronised pricing of similar assets. It is one of the most striking features of late-20th-century globalisation: cross-border financial flows grew far faster than trade flows from the 1980s onward.
Financial integration was deliberately produced by policy: capital-account liberalisation, deregulation of banking, the removal of currency controls, the abolition of restrictions on foreign ownership, and the creation of international payments and clearing infrastructure. It is reversible — emerging-market crises in the 1990s and the global crisis of 2008 led some countries to reimpose capital controls.
Why it matters
How it works
Financial integration operates through several channels. Banks open branches abroad, lend across borders, and trade in foreign-currency assets. Asset managers hold portfolios containing securities from many jurisdictions. Multinational corporations locate financing in whichever jurisdiction is most efficient. Securities exchanges link directly to one another. Payment and settlement systems (SWIFT, CLS) provide the infrastructure.
The result is that asset prices in one country respond rapidly to events in another, and that the cost of capital for borrowers is shaped by global savings flows as much as by domestic policy. This brings benefits — capital flows from richer to poorer countries that need it most — and risks — sudden reversals can devastate the economies that hosted those inflows.