The financial crisis has been attributed partly to perverse incentives for traders at banks and has led policy makers to propose regulation of banks' remuneration packages. We explain why poor incentives for traders cannot be fully resolved by only regulating the bank's top executives, and why...

We study incentives of banks to reserve liquidity given that they can rely on the interbank market to mitigate crisis-related liquidity shocks. Banks can partially pledge their assets to each other, but not to the rest of the economy. Therefore liquidity provision is endogenous. We show that if...