What is supervision?

What is supervision?

Published: 21/9/2023

The banking system plays a key role in financial intermediation, in particular in the processes of mobilising and redistributing savings, and in payment systems. The impact of the banking system on the economy is significant. The negative impact that weaknesses in this system can have on the health and effectiveness of the real sector is particularly pronounced. The stability of the banking system is therefore in the particular public interest.

In addition, banks are the only ones authorised to receive deposits and other forms of repayable funds from the public. In order to protect depositors, a certain amount of these deposits is legally insured and paid from the funds of the State Agency for Deposit Insurance and Bank Resolution if the deposit institution fails. This payment, if not recovered from the bankruptcy estate of a failed institution, represents a significant burden on public debt. It is therefore important to ensure that the institution ceases operations before accumulating losses that are substantially higher than its capital.

Both of these objectives – to preserve the stability of the system as a whole and to remove non-solid institutions from the market in a timely manner – are achieved by laying down specific rules to be complied with by all banking institutions, i.e. all institutions that take deposits from the public and grant loans from these funds. These rules cover all key parts of the business: authorisation, ownership structure, organisation, management system of the institution, reporting to supervisory authorities, risk management and sufficient quantity and quality of capital to cover those risks.

Supervision verifies whether the bank operates in accordance with these rules. Therefore, the main objective of supervision is to maintain confidence in the banking system, promote and preserve its safety and stability and remove from the market institutions that operate contrary to these principles. This reduces the risk of losses for depositors and other creditors of the bank and the company as a whole.