The first essay examines the impact of minimum capital requirements on the share
of shadow to total banking assets. Previous literature has argued that increased regulation
of the traditional banking sector will lead to regulatory arbitrage and an increase in shadow
banking activities. That is, banks shift their operation away from traditional banking into
the less regulated shadow banking sector when traditional banking activities are more
heavily regulated. This hypothesis is tested using data from 76 countries over the 2005
through 2010 period. The results provide some evidence in favor of the regulatory arbitrage
hypothesis, but only for high-income countries.