1 The experience of recent decades from emerging as well as industrialised countries has mostly confirmed the first claim, namely, that deeper financial markets improve economic efficiency, lead to a better allocation of productive capital, and increase long-term economic growth.
However, the frequent financial shocks associated with dynamic financial industries, and in particular the recent economic crisis, also highlight the role large financial markets play in downside risk. This combined evidence implies that there is a trade-off between a highly vibrant financial sector and the overall stability of the financial system.