The low cost of financing fostered in turn an increase in the level of leverage of the domestic financial sector which exacerbated systemic risk. 8 This interpretation of the events makes an important point, namely that increasing the stability of the global financial system should not be done by pushing back financial globalization, but by first addressing the problem of the global imbalances.
A second example of the nuances involved in assessing the destabilising potential of financial integration is banking integration. While in principle it is associated with enhanced efficiency, certain circumstances, such as regulatory arbitrage and lack of transparency in transactions, can exacerbate information problems associated with cross-border banking and lead to misaligned incentives, excessive risk-taking, and underestimating the social cost of contagion.