One of the sectors worst affected by the turbulent credit market environment after the summer of 2007 is the financial guarantor sector (also referred to as "bond insurers" or "monolines"). Large credit spread increases, coupled with rating downgrades on structured credit products against the default of which the financial guarantors had sold protection, caused large mark-to-market losses for most financial guarantors, which weakened their capital positions. The capital shortfalls led to a questioning of the ratings of the financial guarantors (often AAA-rated), and guarantors that were not able to raise new capital were downgraded by rating agencies. The rating downgrades of some financial guarantors led to rating downgrades and value losses for the securities that they had insured. These developments rippled through parts of the financial system and capital markets through both direct and indirect channels. This box describes the financial guarantor business model and how the problems in the sector spread to other parts of the financial system and to capital markets. The marked increase in valuations in Chinese equity markets between early 2006 and the autumn of 2007 and the correction that occurred after the finalisation of the last FSR have given rise to financial stability concerns about the potential consequences of a bubble burst. While implications for euro area financial stability should not be overstated, this box reviews recent developments in Chinese equity markets, as they have attracted significant attention since the publication of the last FSR. Notwithstanding the positive contribution they can make in facilitating portfolio diversification and the distribution of risk across a wide range of investors – thus enhancing credit risk management possibilities – structured finance markets played a central role in propagating the initial sub-prime mortgage market shock across broader credit markets (see Figure A). This box examines some of the factors which contributed to such propagation. Delinquency and foreclosure rates on US mortgages started to increase in mid-2006, especially for adjustable-rate sub-prime mortgages (see Chart A). Compared to the previous economic downturn in 2001-2002, delinquency rates have not been exceptionally high. However, a new structural feature of the market is the substantial share of sub-prime mortgages, which increased from just over 10% of the total stock of mortgage loans in 2000 to over 20% in 2006. This category of mortgage loan exhibited a much higher incidence of delinquency, with sub-prime adjustable-rate mortgages (ARMs) registering a delinquency rate of 20% in the fourth quarter of 2007, up from 6.6% in the first quarter of 2006. In this sub-category, the US Treasury estimates that approximately 1.8 million adjustable-rate sub-prime mortgages – with an estimated value of between USD 300 and USD 400 billion – will reset in 2008 and 2009. The bulk of these resets are expected to take place during the first three quarters of 2008 and should decline rapidly thereafter. As the fragility of sub-prime ARM mortgages is pivotal to the financial stability outlook at the current juncture, this box explores how the interest rate burden implied by these resets varies with the interest rate. This special feature examines whether securitisation activity and banks’ risk-taking have had any impact on euro area banks’ lending behaviour. It finds this to be the case. In particular, based on a sample covering around 3,000 intermediaries over the first seven years of EMU, it is found that the favourable financial condition of banks together with strong securitisation activity seem to have diminished the importance of the bank lending channel and strengthened the ability of banks to supply loans. However, it is also found that this capacity depends upon business cycle conditions and, notably, upon banks’ risk positions. In other words, deterioration in either could have an adverse affect on bank loan supply. Information from equity and credit market based indicators of banks is commonly used for financial stability assessment. In this practice, it is often assumed that equity market-based indicators provide information on the markets’ assessment of the outlook for, and the risks surrounding, future banking profitability. At the same time, for the credit-based indicators the prior assumption is that these provide information on the credit risk outlook for banks or the likelihood of bank failure.