We investigate the degree of financial integration within and between European countries. We construct two measures of de-facto integration across European regions to capture "diversification" and "development" finance in the language of Obstfeld and Taylor (2004). We find evidence that capital market integration within the EU is less than what is implied by theoretical benchmarks and also less than what is found for U.S. states. We ask -why is this the case? Using country-level data for economic institutions, we find that these are not able to explain differences between countries. Using regional data from the World Values Surveys, we investigate the effect of "social capital" on financial integration among European regions. We find regions, where the level of confidence and trust is high, are more financially integrated with each other.

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Understanding the impact of financial variables on the current account balance is one of the priorities of academic literature and policy makers. Evidence from a broad panel of countries shows that an increase in the credit growth causes a significant deterioration in the current account balance. We find that this result is driven by household credit. Furthermore, we show that total and household credit growth rates have a stronger negative effect on the current account balance for lower levels of financial depth. In other words, the demand boom associated with the credit expansion gets weaker for higher levels of financial depth. Thus, our findings are in line with the "too much finance" hypothesis which states that positive impact of financial development on economic growth vanishes as the level of financial depth increases. Our results suggest that targeted policy measures which curb the excessive household credit growth might be more effective to reduce the external imbalances particularly at the early stages of financial deepening.

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