[3] Financial integration is believed to date back to the 1690s and was briefly interrupted at the start of the French Revolution (Neal, 1990[4]).
However, it was in the Classical Gold Standard Era (the period from the mid-1870s until the start of World War I) that financial integration began to take shape in Europe.
In these periods, for examples, the securities and foreign exchange markets were closely linked; stock and bond markets were internationally linked; international arbitrage activities were no strangers; and commercial and investment banks in major economies established a linkage (Jackson and Lothian, 1993;[6] Lothian, 2000.
Benefits of financial integration include efficient capital allocation, better governance, higher investment and growth, and risk-sharing.
As a result of financial integration, efficiency gains can also be generated among domestics firms because they have to compete directly with foreign rivals; this competition can lead to better corporate governance (Kose et al., 2006[1]).
Likewise, financial integration can help capital-poor countries diversify away from their production bases that mostly depend on agricultural activities or extractions of natural resources; this diversification should reduce macroeconomic volatility (Kose et al., 2006[1]).
Consequently, financial integration actually hurts capital-scarce countries with poor institutional quality and lousy policies.
Consequently, developing countries that welcomed excessive capital flows were more vulnerable to these financial disturbances than industrial nations.