We examine the constraints that the observations of different spectral states displayed by Galactic black hole candidates impose on the properties of magnetic flares resulting from the reconnection of flux tubes that rise from the accretion disc into a corona because of the magnetic buoyancy (Parker) instability. Using observations of one of the best-studied examples, GX339-4, we identify the geometry and physical conditions characterizing each of these states. We find that, if in the soft state flaring occurs at small scaleheights above the accretion disc, a soft thermal-like spectrum, characteristic of this state, can result from the heating and consequent reradiation of the hard X-rays produced by such flares. The hard tail can then be produced by Comptonization of the soft radiation. Conversely, the hard state may result from a phase in which flares are triggered high above the underlying accretion disc and produce X-rays via Comptonization of either internal cyclo-synchrotron radiation or soft disc photons. The spectral characteristics of the different states are naturally accounted for by the choice of geometry: when flares are triggered high above the disc the system is photon-starved, hence the hard Comptonized spectrum of the hard state. Intense flaring close to the disc greatly enhances the local soft-photon field with the result that the spectrum softens. We interpret these two states as being related to two different phases of magnetic energy dissipation. We speculate that, in the soft state. Parker instability in the disc may favour the emergence of large numbers of relatively low-magnetic-field flux tubes. In the hard state, only intense magnetic fields become buoyant and magnetic loops are able to rise and expand in the coronal atmosphere. This possibility can also qualitatively account for the observed short time-scale variability and the characteristics of the X-ray-reflected component of the hard state.
