This issue of the European Business Organization Law Review is devoted to the full range of fundamental problems in the field of law and finance. At the same time, it highlights the major disruptions of financial markets at the example of these issues. Ultimately, this raises the forward-looking question about changes for the paradigm in law and economics possibly resulting therefrom. The articles in this issue originate from papers and proceedings of the kick-off conference for the new doctorate and PhD programme at the Goethe University on ‘Law and Economics of Money and Finance in Times of Financial Crisis’, which took place at the House of Finance/Goethe University of Frankfurt on 15 and 16 May 2009. As programme directors and organisers of the conference, we are proud and delighted that so many outstanding scholars from Europe and the United States agreed to present a paper and participate in the ensuing, most lively discussions, thus contributing to a very prolific intellectual exchange and a very successful kick-off of our programme to be launched this fall term.

The governance of finance is replete with challenges as evidenced by the frequent financial crises that have accompanied the growth and development of financial markets. Every crisis can be taken as a symptom of governance failure. The immediate reaction tends to be an attempt to fix the problems that gave rise to the most recent crisis. By definition, such a regulatory approach lags behind actual developments on the financial marketplace, thereby inadvertently sowing the seeds for the next governance failure. A similar lag effect can be observed in current attempts to repair the governance of global finance. This paper argues that reform proposals currently under discussion fail to take into account important changes in the organisation of global financial relations between financial intermediaries, their home governments and sovereign wealth funds (SWFs). They challenge the basic principles that inform conventional regulatory regimes: a clear distinction between public vs. private; regulation vs. firm-level governance; and stakeholding vs. supervision. The paper discusses alternative modes of governance that have emerged during the crisis and are complementing for, if not substituting, more conventional forms of governance.

Sovereign wealth funds have been investing governments' foreign assets for decades, although it is only in recent times that such funds have emerged as managers of large ‘excess reserves’. Since the crisis however, the sources of funding for sovereign wealth funds have evaporated, while advanced economies are competing for capital injections from these funds. At the same time, the concerns about excessive investment of sovereign wealth funds in advanced economies that were widespread prior to the crisis, are now being voiced less frequently. Against this background, this article provides a reassessment of the growth prospects of sovereign wealth funds. Although the growth path for these funds indeed needs to be revised substantially, there are no grounds to believe that sovereign wealth funds will become less important players in global financial markets over the future, as the structural drivers behind the accumulation of large foreign assets in emerging economies remain in place. Hence, sovereign wealth funds are likely to continue growing and increase their relative importance in global financial markets. Therefore, it remains imperative to resume the efforts – that seem to be partly halted by the current economic and financial crisis – to build a global governance framework for sovereign wealth funds.

The global financial crisis has revealed significant weaknesses in resolution regimes for large and internationally active financial institutions. The nub of the problem is the mismatch that exists between the way institutions are organised and operate, the way they are regulated and supervised and the way they are resolved in a crisis. The Lehman case illustrated that the greater the integration of individual entities into the operations of the wider group, the greater the challenges in achieving an orderly resolution. In a crisis it is legal entities rather than business lines that fail, and it is the legal entities that will be liquidated in separate and territorially-based proceedings. It is unrealistic to expect the creation of a global regulatory authority or an overarching international insolvency framework for cross-border financial groups in the foreseeable future. In light of the quasi-insurmountable obstacles to achieving a framework that adapts legal and regulatory frameworks to the economic reality of complex group structures and allows for a coordinated (or even consolidated) resolution of global financial institutions, this paper proposes an alternative approach. In order to reduce the complexities in resolution it suggests changes to the way in which financial groups structure themselves and conduct their operations.

The financial crisis has demonstrated the importance of strengthening liquidity risk management and supervision. Such strengthening must take account of the system-wide dimension of risks: the likelihood that a number of firms will face a common stress at the same time, and the impact of their response to that stress on other firms and the wider system. Five high-level objectives are presented to guide the future development and design of a framework to contain system-wide liquidity risks.

Good corporate governance of banks is of a vital concern to banks themselves as well as to the banking supervisors. During the past decade, listed banks and even non-listed institutions worldwide started to publicly emphasise that good corporate governance is of vital concern for the company, and even to adopt individualised corporate governance codices. In turn, the Basel Committee on Banking Supervision already published two editions of a guideline entitled ‘Enhancing corporate governance for banking organisations’ which reflects the supervisors' taking on the issue to perfection. Last but not least, two years into the financial crisis, the issue of banks' good corporate governance has started to attract pronounced interest, with the OECD taking a leading role. Against this backdrop, the article, on the one hand, discusses the particularities of banks' corporate governance – due in large part to banking regulation and to deposit insurance – in a principal-agent framework, and, on the other hand, presents the supervisors' financial stability perspective taking the Basel Committee's guidance as a starting point. The article concludes with reflections on some tentative lessons from the current crisis for (banks') good corporate governance: banks' corporate governance differs from that of a generic firm. Deposit insurance and prudential regulation, while aimed at compensating for deficits in the monitoring and control of banks, both act to exacerbate the particular problems that are inherent in banks' corporate governance. From this perspective, banking regulation and banks' corporate governance interact as the driving forces of a vicious circle that produces ever more regulation. Hence, one may doubt whether banks' corporate governance should map the way forward for corporate governance in general. In particular, this holds true for the way forward to regulating bankers' pay.

Regulators around the world, including the European Commission, are becoming increasingly interested in behavioural finance as a toolbox for better securities regulation. When securities laws are designed to prevent or minimise the effect of systematic investor bias, they may violate one of the most fundamental principles of traditional securities regulation, the ‘inalienable right of everyone to make a fool of him (and her)self’ (Louis Loss). The paper discusses the potential and boundaries of an alternative concept of investor protection, based on the assumption that investors systematically fall prey to certain fallacies. Unlike the philosophy underlying traditional securities regulation, this concept's impetus is not the danger of market failure caused by asymmetric information but by bounded rationality. Its objective is not the informed but the prudent investment decision. Its measures are rules of an ‘asymmetric’ or ‘libertarian’ paternalism which lead those who need help to better investment decisions without limiting the freedom of those who do not need or want any assistance. The paper exemplifies this concept by analysing how the Market in Financial Instruments Directive's conduct-of-business regulation could be re-shaped to protect overconfident investors who suffer from biased self-attribution and confirmation bias from the dangers of excessive trading.

The sale of retail financial products, such as investment funds but also mortgage products, is frequently combined with the provision of advice, which opens up the possibility of unsuitable advice and misselling. The article argues that despite recent legal changes in Europe, such as MiFID, there is still much scope for the improvement of both legal norms and supervisory activity. To obtain a logically consistent and workable framework, consumer protection, both generally and applied to the field of retail finance, must be put on a sound economic basis.

This article describes compensation contracts in private equity. It shows that they may not align interest between the investors and fund managers as much as commonly thought. Certain clauses appear as potentially hazardous for investors and others exacerbate conflicts of interest.