Financial market segmentation of course reduces the risk of a financial crisis, but it is deeply inefficient

It is often maintained that interconnectedness between financial markets or financial intermediaries is dangerous because it increase s the risk of a systemic financial crisis. This idea is quite right. Over the past ten years, there has been a significant decline in financial interconnectedness, for example: Sharp decline in securitisation (which transferred bank loans to institutional investors); Decline in the size of cross-border claims; In the euro zone, the interbank and bond markets have been segmented along country lines. But while the decline in financial interconnectedness reduces the risk of a systemic crisis, it does create a deep inefficiency by leading savings to be invested locally and to insufficient risk diversification.