This paper focuses on the current issues linked to the goals of banking regulation and supervision. The banking supervision policy carried out in transition countries – Central and Eastern Europe – takes into account a range of specific phenomena. The key distinctive factor of banking supervision and regulation in these economies was until recent the absence of a market-oriented banking system....

We show that the regulation of bank lending practices is necessary for the optimal provision of private liquidity. In an environment in which bankers cannot commit to repay their creditors, we show that neither an unregulated banking system nor narrow banking can provide the socially e¢ cient amount of liquidity. If the bankers provided such an amount, then they would prefer to default on their...

Khartabil provided exceptional research assistance. The views expressed in the paper are those of the author and do not necessarily reflect the opinions of the International Monetary Fund.