Regulatory arbitrage?

Can someone help me out and decipher the following quote:

"What we have is obviously very dynamic markets that have the ability to run circles around regulators and they have an incentive to exploit every possible opening there is for regulatory arbitrage," says Raghuram Rajan, a University of Chicago economist who sounded alarms about the excesses building up in the financial system back in 2005.

(from "Markets Police Themselves Poorly, But Regulation Has Its Flaws", WSJ, 21 July 2008)

Who is the "they"? The regulated agents, i.e., banks and other financial institutions? What exactly is "regulatory arbitrage"?

A google search turns up this from wikipedia:

Regulatory arbitrage is where a regulated institution takes advantage of the difference between its real (or economic) risk and the regulatory position. For example, if a bank, operating under the Basel I accord, has to hold 8% capital against default risk, but the real risk of default is lower, it is profitable to securitise the loan, removing the low risk loan from its portfolio. On the other hand, if the real risk is higher than the regulatory risk then it is profitable to make that loan and hold on to it, provided it is priced appropriately.

This process can increase the overall riskiness of institutions under a risk insensitive regulatory regime, as described by Alan Greenspan in his October 1998 speech on The Role of Capital in Optimal Banking Supervision and Regulation

I need to sit down and unpack all that..