hedgefund intelligence ) set the assets in global hedge funds at about 2. 0 trillion u. s. dollars by the end of 2006, of which nearly 1. 5 trillions in u. s. funds, roughly 450 billions in european funds and 150 billions in asian funds. fig. 4 - global hedge fund assets ( billions of u. s. dollars ) 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 sources : hedge fund research, world federation of exchanges ( fibv ), bank for international settlements ( bis ) and swiss re economic research & consulting. • an important dimension of the greater diversification of risk has been the increased international financial integration. in the last decade industrial countries ’ gross external financial assets and liabilities more than doubled in proportion to gdp, reaching 320 per cent ( fig. 5 ). fig. 5 - gross stocks of foreign financial assets and liabilities ( sum of financial assets and liabilities in percent of gdp ) industrial countries emerging countries source : imf ( lane – milesi - ferretti database ). ( 1 ) for each group, weighted average calculated using gdp weights. as a consequence, the range of financing and investment opportunities available to economic agents widened, as reflected in the composition of the balance sheets of firms and households. in particular : • the set of corporate finance instruments used by euro - area firms has broadened. in the first three years after the introduction of the single currency, the net issuance of corporate bonds accelerated dramatically ( fig. 6 ). the marked deceleration that has been observed in the most recent years reflects, on one side, the impact of corporate scandals, but also, on the other side, the greater availability of bank credit resulting from credit market innovations. fig. 6 - external financing of euro - area non - financial corporations ( net issuance ; annual growth rates ) total external financing bank loans quoted shares debt securities source : ecb. • the market has also broadened, not only in terms of the instruments available but also with respect to the increasing access of a larger number of firms, including those with lower ratings. this increased availability of funds has been extensively used to finance m & a activities. • between 1995 and 2006 the composition of euro - area households ’ financial assets has progressively shifted away from traditional instruments, such as banknotes and deposits, to more sophisticated financial assets whose prices are more sensitive to market movements and credit risk. the share of bonds,

reflected in consumer spending through the cost and availability of credit. 5 • while speeding up the transmission of policy decisions through the term structure and asset prices, financial innovation weakens the so - called “ bank lending channel ”. traditionally, interest rate increases were thought to decrease banks ’ credit supply ( through a reduced availability of core deposits ), which in turn would affect those borrowers that mostly depend on bank credit for external financing. asset securitisation increases banks ’ liquidity and reduces their funding needs in the event of a monetary tightening, while also allowing them to transfer part of credit risk to the markets, thereby easing regulatory capital requirements when needed. 6 moreover, a wider range of borrowers is now able to make recourse to financial markets as a substitute for banking sources of financing. there are still, however, a number of open questions : • first, is the broad credit channel really weaker? true, the relevance of the “ bank lending channel ” is affected negatively by loan securitisation and the emergence of non - bank lenders. however, as i have mentioned, the effects that work through the value of collateral and the balance sheets of firms and households ( the so - called “ financial accelerator ” ) are changing, but certainly not losing importance. the conditions at which bank and non - bank lenders are able to attract external funds or f. altissimo, e. georgiou, t. sastre, m. t. valderrama, g. sterne, m. stocker, m. weth, k. whelan and a. willman, “ wealth and asset price effects on economic activity ”, ecb occasional paper no. 29, june 2005. l. guiso, m. paiella and i. visco ( 2006 ), “ do capital gains affect consumption? estimates of wealth effects from italian households ’ behavior ”, in l. r. klein ( ed. ), long run growth and short - run stabilization. essays in memory of albert ando, edward elgar, london, 2006. j. muellbauer, “ housing, credit and consumer expenditure ”, paper presented to the kansas city federal st st reserve ’ s jackson hole symposium, 31 august – 1 september 2007 ; c. carroll, m. otsuka and j. slacalek, “ how large is the housing wealth effect? a new approach ”, johns hopkins university economics working paper 535, 2006. y