Financial integration

Financial integration is a phenomenon in which financial markets in neighboring, regional and global economies are closely linked together.This process can take many forms, including cross-border capital flows(for example,firm raising funds on capital markets cross-border),foreign participation in domestic markets (for example, a parent bank’s ability to set up a subsidiary abroad), sharing of information and practices among financial institution, or unification of market infrastructures. Perfect integration exists if similar assets have the same price even if they are traded on different market.

We define financial integration by two main criteria:

  • Degree of cross border financial activity:

    This concept of integration is very close to “financial Globalization” defines as the extent to which countries are linked through cross-border financial holding, and proxied  by the some of country’s  gross external assets and liabilities relative to GDP.

  • Degree of convergence and consolidation across market:

    In this, financial openness and free access are not sufficient conditions for integration. Two markets can be perfectly open to each other but still imperfectly integrated.