As the full extent of damage resulting from past environmental practices has been realised, governments around the world have attempted to allocate the cost of clean-up to those responsible for pollution generating activities. As a result of seeking to make polluters pay. Lender liability laws have been enacted providing for creditors to pay the cost of remedial measures for the environmental damage caused by borrowers. In this paper, the desirability and effectiveness of lender liability laws as a mechanism to fund the clean-up of past environmental damage and prevent future environmental damage, are examined within an institutional framework. In the presence of high transaction costs. Liability laws are unlikely to be effective in achieving the desired outcomes given the attenuated structure of entitlements they generate.