8 CORPORATE SOCIAL RESPONSIBILITY: HOW DOES IT AFFECT THE FINANCIAL PERFORMANCE OF BANKS? EMPIRICAL EVIDENCE FROM US, UK AND JAPAN a Grace Keffas, and b Omiete Victoria Olulu-Briggs a Financial Markets Department, Central Bank of Nigeria, Abuja. b Department of Banking and Finance, University of Port Harcourt, Nigeria. ABSTRACT This paper examines the financial performance of CSR and Non-CSR banks using financial ratios and frontier efficiency analysis. We got accounting information for banks in Japan, US and UK quoted on the FTSE4Good global index from Bankscope database. They include thirty-eight (38) financial and economic ratios based on variables such as Asset quality, Capital, Operations and Liquidity; that captured major scope of financial performance. In addition, we used a non-parametric linear programming technique known as Data Envelopment Analysis to create a piecewise linear frontier that helps to determine the efficiency levels for both a common and separate frontier analysis. First, we find a positive relationship between corporate social responsibility and financial performance. Banks that incorporate CSR have better asset quality; capital adequacy; and are more efficient in managing their asset portfolios and capital. Second, we also find that geographic location regulates the relationship between CSR and FP during economic contraction, such that the relationship differs across relationship and transactional banking models. The findings are to an extent consistent with prior analysis on the CSR-FP link. Keywords: Corporate Social Responsibility, Financial Performance, financial ratios, frontier analysis, value creation. INTRODUCTION In the global market, corporate firms want to establish strong competitive advantage over their rivals in the same industry. They seek value creation and above average risk- adjusted rates of return in order to outperform their benchmarks. In recent times, it has been generally perceived that socially responsible firms can secure this advantage. In a paper by Salzmann et al, (2005) they provide evidence that a growing number of companies perceive value addition in socially responsible behaviour. Friedman (1970) asserts that the social responsibility of firms is to maximize profits. Credit markets and banking systems experienced contracted liquidity from 2007-2008 due to a drop in the US housing prices. This made refinancing of mortgage loans to be somewhat difficult as borrowers were left with low-value houses on one side and debts on the other side. Josh and Bradley (2008), report that major banks and other financial institutions around the world have reported losses of approximately $435 billion as of July 17, 2008. An 89% decline in profit for the 2007 fourth quarter was experienced by 8,533 US banks insured by FDIC, the worst bank and thrift quarterly performance since 1990 (FDIC, 2008). Northern Rock and Bear Stearns have both required emergency assistance from central banks due to the crisis (BBC News Channel, 2008). The issue of financial engineering also came into play where mortgage lenders pass the rights to the mortgage payments and related credit/default risk to third-party investors via mortgage-backed securities (MBS) and collateralized debt obligations (CDO). With the credit risk off the balance sheets of originating banks, they had no real incentive to ensure that these loans were granted to Volume 3, March 2011 © 2011 Cenresin Publications www.cenresin.org Journal of Management and Corporate Governance