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The paradigm of self-stabilizing, equilibrating financial markets, respected for a long time, is seriously challenged by the recent financial crisis. Despite sophisticated bank risk management and comprehensive bank supervision interbank and corporate bond markets collapsed in 2007–2009. The state interventions required for saving banks are without precedent in modern economic history. In this essay we attempt to explain financial market instability. Key determinants of the crisis are, in our opinion, weaknesses of the information architecture which should provide credible information for investors. Three determinants of instability are identified: first, the utilization of debt instruments combined with high degrees of corporate leverage; second, the tradeability of securities combined with increased risk taking; and third, the increased degree of complexity of financial products and networks, combined with more homogeneous asset and risk structures of banks. These determinants strengthen financial system vulnerability and the role of the information architecture. We discuss several requirements for a meaningful regulatory reform, leaving out incentive issues (which are treated in Franke/Krahnen 2009 ), namely credible provision of information, macro-prudential supervision, robust capital standards, as well as a limitation of risk clustering in derivative markets. [ABSTRACT FROM AUTHOR]