Finance Theory, Lender Liability and the Value of Banking Relationships : A Survey and Interpretation

What happens when valuable loan relationships are destroyed through a bank's actions? This paper summarizes financial theory and empirical studies related to the case law on lender liability, focusing particularly on breach of contract. Lender liability reflects asymmetric information, market imperfections, and transactions costs. It appears to arise in part out of agency problems between the bank and the loan officer. Damage awards from lender liability cases illustrate that the value of a bank loan relationship is substantial