Purpose The purpose of this paper is to test the impact of corporate social responsibility (CSR) in the banking industry using Troubled Asset Relief Program (TARP) as an experimental backdrop. Design/methodology/approach The authors match banks that received TARP with CSR data on publicly available firms. Using this data set, the authors are able to perform both univariate and multivariate analyses to determine the impact of CSR on bank management behavior. Findings The authors find evidence that supports stakeholder theory as applied to a sample of large financial institutions. The authors show that banks increased their CSR involvement and intensity following TARP, evidence that CSR is not merely transitory in nature but structural and an important aspect of firm value. The authors also find that capital ratios increase to a greater degree in banks whose CSR ratings were stronger prior to TARP. Finally, while all banks in the sample repaid Treasury, it took strong CSR banks a longer time to repay than banks with weaker CSR. The authors show how CEO compensation played a role in this relationship. Research limitations/implications The findings are limited to large banks. Practical implications Practically speaking, this study helps to discern the motivations and actions of large financial institutions. This is especially important from a regulator perspective, whose function is to maintain overall national financial stability. Originality/value This is the first study to link TARP and CSR literatures. Overall, there are a limited number of studies on CSR in the banking industry, and this paper adds to this burgeoning area. It is important and valuable to managers and policymakers to understand implications of CSR in the financial sector.

Depository institutions may use information advantages along dimensions not observed or considered by outside parties to "cream-skim," meaning to transfer risk to naïve, uninformed, or unconcerned investors through the sale or securitization process. This paper examines whether "creamskimming" behavior was common practice in the subprime mortgage securitization market prior to its collapse in 2007. Using Home Mortgage Disclosure Act data merged with data on subprime loan delinquency by ZIP code, we examine the bank decision to sell (securitize) subprime mortgages originated in 2005 and 2006. We find that the likelihood of sale increases with risk along dimensions observable to banks but not likely observed or considered by investors. Thus, in the context of the subprime lending boom, the evidence supports the cream-skimming view.

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Depository institutions may use information advantages along dimensions not observed or considered by outside parties to "cream-skim," meaning to transfer risk to naïve, uninformed, or unconcerned investors through the sale or securitization process. This paper examines whether "creamskimming" behavior was common practice in the subprime mortgage securitization market prior to its collapse in 2007. Using Home Mortgage Disclosure Act data merged with data on subprime loan delinquency by ZIP code, we examine the bank decision to sell (securitize) subprime mortgages originated in 2005 and 2006. We find that the likelihood of sale increases with risk along dimensions observable to banks but not likely observed or considered by investors. Thus, in the context of the subprime lending boom, the evidence supports the cream-skimming view.

No abstract