However, these clauses create a sort of vicious circle. Indeed, rating agencies are expected to help borrowers to make informed decisions for future financing ; still, through these trigger clauses, rating decisions have an impact on the outstanding debt of borrowers, thus aggravating the situation of the debtor. •  The generalisation of credit risk hedging through short selling of stocks. Hedging is a key technique for a smooth functioning of financial markets. However, the use of new financial techniques to hedge has had unexpected consequences. Indeed, financial institutions have  2  BIS Review 62/2002  tended to hedge part of their credit exposure on borrowers by short selling stocks of their debtors. Doing so, they have hedged their risks but at the cost of a further deterioration of the overall situation of their debtor associated with the fall of their shares resulting from such sales. •  The marketing of saving instruments with capital protection feature. These instruments are based upon a built-in asymmetry : they offer the full participation in stock market capital gains and the protection against possible capital losses. Either the issuers of such instruments are not hedged, and enormous risks are concentrated on them. Or, more likely, they are hedging their risks and thus they contribute to amplify current trends, be it downward or upward. I have to be clear: all these techniques and instruments contribute to a better functioning of financial markets. For each and every market participant, they facilitate the management of credit and market risks.

I would like to briefly sketch two main features of this financial instability:  First, while globalisation and financial integration have decisively contributed to improving overall economic efficiency, experience also suggests that financial asset prices have experienced in many occasions somewhat erratic movements resulting in overshooting and misalignments. This pattern applies to a wide range of markets: exchange rates as well as bond and equity markets in both emerging and mature markets. The very fast ballooning of the "new economy" bubble in 1999 and early 2000 -followed by a series of sharp corrections- illustrates the potential of markets to provide funding to the real economy, particularly to the most innovative sectors; but it also demonstrates again some tendency of markets to over-react, moving from excessive optimism to disproportionate pessimism. BIS Review 62/2002  1  Thus, financial authorities have been confronted with boom-bust episodes which must be carefully monitored and assessed since they have the potential to affect the global monetary and financial stability. The second feature is a growing tendency towards volatility on financial markets, in the most advanced economies as well as in emerging markets economies. Since the beginning of the mid-nineties, volatility has become higher on both international stock markets and foreign exchange markets. Volatility per se is not an issue from a financial stability point of view. Not only is volatility inherent to financial markets but it is taken into account in many areas of the operational frameworks of financial markets.