Excessive (substantially above peer) litigation against a bank is indicative of operational risk because it often suggests failure to maintain a strong system of internal control. We examine the relation between bank performance and weak internal control using legal expense as a proxy. We find...

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...

Low spreads between loan rates and deposit rates are indicative of a more efficient financial system. We argue that spreads are better cross country measures of banking system efficiency than the net interest margins used in previous studies. We present theoretical and empirical evidence that...

Theoretical concepts and empirical tests in one area of economics and finance can provide insights into other areas far removed from the original area of inquiry. We show that efficiency wage theory (EWT) helps explain differences in commercial bank financial performance. EWT is a macroeconomic...

Directors help determine the strategic direction of a corporation and are responsible for ensuring the institution has a good system of internal control. Banking institutions without a strategic direction emphasizing sound lending practices that promote the long-run financial health and...

Deposit insurance is a put option that encourages excessive risk taking by banks. Excess litigation against a bank, a form of operational risk, is one indicator of risk because litigation often reflects a failure to maintain a strong system of internal control. We analyze five different measures...

In this paper we provide an empirical link from Fama (1985) and James' (1987) observation that banks are special to Diamond and Rajan's (2001) model of the banking firm as an active monitor financed with demandable debt. Drawing on a sample of 423 bank loan announcements made during 1988-1996,...

A number of studies have argued that the thrift industry is not viable as it is presently structured and regulated because mortgage yields are inadequate to cover interest and operating costs. This hypothesis suggests that observed profitability is primarily the result of the tendency of the...

Consolidation in the banking industry has sparked concern about the survival of small banks. However, if small banks are better at processing credit information than large banks, they should continue to survive in a competitive environment. We evaluate risk-adjusted commercial loan yields (gross...

Pivotal litigation against the largest subprime mortgage servicer in the US provides lessons about the appropriate regulation of mortgage servicing and adds to research about the causes of the financial crisis. Mortgage servicing is essential to the functioning of the financial system so...