International financial flows both contributed to and propagated the global financial crisis and the ensuing collapse of trade, output and employment. Financial integration only survived relatively unscathed because the global regulatory response was swift and decisive, creating a financial system that posed fewer risks to the world economy.
Any reversal would call into question whether the lessons of the crisis have indeed been learnt – and thus whether financial integration can still be considered safe. Third, financial regulation interacts critically with monetary policy. Lax regulation implies an underestimation by regulators of incentives which lead to behaviour that is individually profitable, but socially costly.