These mechanisms work only as long as the collateral is of sufficient quality; during macroeconomic downturns, the value of collateral may fall, problems of adverse selection and moral hazard again become central, and lenders become much less willing to lend. Again, these events can result in an adverse feedback loop.
Shocks of various natures can interfere with the information flow in financial markets and thereby precipitate financial instability through valuation and macroeconomic risk. Historical examples of such shocks include higher interest rates, problems in the banking sector, increases in uncertainty, and asset market effects on balance sheets.