Date of Award


Degree Name

Doctor of Philosophy



First Advisor

Dr. Susan Pozo

Second Advisor

Dr. Debasri Mukherjee

Third Advisor

Dr. Isabel Ruiz Olaya


Capital Regulations, Shadow Banking, Economics, Risk-taking, Traditional Banking, Minimum Capital Regulations


The shadow banking sector is a sector that is comprised of financial intermediaries that do not have access to central bank funds and performs their activities outside the regular banking system. This sector had been rapidly growing in most developed economies. This dissertation focuses on the behavioral difference and interaction of the traditional and shadow banking sectors as displayed by the relative asset position of both sectors, their risk-taking positions, and their business-cycles properties.

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.

The second essay focuses on bank risk-taking behavior when the capital requirement is strengthened. Risk is proxied by the share of non-performing loans to total loans in the bank’s portfolio. Using cross-section data from 82 countries, it examines whether one banking sector takes on more risks than the other sector when a specific risk-based capital regulation is applied. The shadow banking sector is found to take on higher risks, as displayed by the loan failures, than the traditional banking sector in response to enhanced capital regulations.

The third essay uses the relationship between leverage and assets to quantify the pro-cyclicality of leverage and evaluates the impact of Basel II implementation on procyclicality. Using panel data from 113 countries over the period of 2005-2012, procyclicality is examined for the shadow and traditional banking sectors. The key results indicate that the traditional banking sector tends to be less pro-cyclical than the shadow banking sector and that Basel II implementation intensifies the pro-cyclicality.

Access Setting

Dissertation-Open Access