In recent years, assets of non-bank financial intermediaries (NBFIs) have grown significantly relative to those of … banks. These two sectors are commonly viewed either as operating in parallel, performing different activities, or as … substitutes, performing substantially similar activities, with banks inside and NBFIs outside the perimeter of banking regulation …

We investigate why only some banks use regulatory arbitrage. We predict that banks wanting to be riskier than allowed … by capital regulations (constrained banks) use regulatory arbitrage while others do not. We find support for this … hypothesis using trust preferred securities (TPS) issuance, a form of regulatory arbitrage available to almost all U.S. banks …