This requires a high degree of ambition and decisive legislative action to create the conditions for capital markets to develop and integrate. These actions are often in politically controversial fields such as in the areas of financial product taxation and insolvency laws.
Third, despite positive effects on financial stability stemming from greater financial diversification and market-based finance, more integration can also entail financial stability risks. It can exacerbate the size and speed of contagion. In addition, the ‘push’ towards market-based financing may lead to the build-up of risks in this part of the economy, typically less regulated and lacking information.