The theory that economy is a financial system consisting of communicating entities implies that economic stability and growth are largely dependant on the mitigation of the risk of loss in the institutions financing business activities. The state's supervision over banking activities (banking supervision) shall primarily maintain the stability and reliability of the banking system by assuring its secure and sensible operation. A key element in the banking supervision is its effectiveness. This is understood, in general, as achieving the basic aims set out for banking supervision. The effectiveness of banking supervision is the product of various factors. The legal framework under which the economic system has to operate is of primary importance here. From the organisational and technical point of view, prerequisites for effective state supervision of the banking system have been formulated by the Basel Committee on Banking Supervision. Also, the organisational structure of banking supervision, and its connections with central banks in particular is considered to be an important factor, influencing the effectiveness of State supervision of the banking sector.

Research on banking supervision is conducted mostly from the perspective of its system and regulations. Banks and their environment form a system consisting of markets, markets' participants, relations between them and the legal framework defining the nature of these relations. Regulations also determine the scope of banking supervision; relations between the parties to the supervision process; available supervision tools, rights and responsibilities of the parties. The prerogatives and the extent of the state's supervision of banking system depend on the economic system, specially on its nature - defined in terms of the extent of its liberalization, of state intervention or of its development level and regulations. The analysis of the banking supervision's influence on the banking sector, from the perspective of its system and regulations, focuses on: public ownership in the banking sector; the powers of banking supervision officers; including the power to issue licenses and to limit the scope of the banks' activities as well as their freedom to enter markets; safety measures and finally; possibilities and incentives for a market-based supervision of banks.

What is the influence of the regulating and supervisory activities upon the stability, performance and development of the banking sector? What kind of mechanisms for the banking supervision better serve the development and stability of banks - market-based or administrative ones? Does direct state interference, whether through state ownership or regulations, facilitate the competitiveness and development of the banking sector? Is formal banking supervision, particularly its broad (in terms of powers) and restrictive nature, an effective state mechanism, to its interference in the development and stability of the banking system? The paper also discusses the effectiveness of the safety and security regulations. Can the capital requirements be an effective tool, leading to sensible bank management? Can more restrictive safety and security measures, particularly those concerning capital requirements, have a positive influence on the banking sector's performance?

The debate is still going on about those issues. The outcome of various research projects which have been undertaken within the last few years, and which are discussed in this article, is a source of new arguments referring to controversial issues, opinions and theories.