What is supervision?

Published: 5/6/2020

The banking system plays a key role in financial intermediation, in particular in the processes of savings mobilisation and redistribution, as well as in payment systems. The banking system has a great impact on the economy. The negative effect which weaknesses in this system may have on the health and efficiency of the real sector is particularly expressed. For this reason, the stability of the banking system is of particular public interest.

In addition, only banks are authorised to take deposits and other forms of repayable funds from the public. For depositors' protection, a certain amount of these deposits is legally insured and is paid from the funds of the State Agency for Deposit Insurance and Bank Resolution in the event of deposit institution bankruptcy. This payment, unless reimbursed from the bankruptcy estate of the bankrupt institution, is a considerable burden for the public debt. For this reason, it is important to ensure that the institution stops operating before it accumulates losses that are significantly higher than its capital.

Both mentioned objectives – maintaining the stability of the system as a whole and removing non-solid institutions from the market at an early stage – are achieved by prescribing special rules which must be complied by all banking institutions, i.e. all institutions that receive deposits from the public and grant loans from these funds. These rules cover all key segments of operation: authorisation, ownership, structure and organisation, institution's governance arrangements, reporting to supervisory authorities, risk management and a sufficient quantity and quality of capital to cover these risks.

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