The aim of the Doctoral Thesis is to develop the regulation model in the banking sector to find the equilibrium point between the deadweight loss arising from market failures and subsequent government regulation costs. In the Doctoral Thesis, banking sector market failures were identified, needed for the assessment of the deadweight loss in the banking sector, and principles of regulation were identified, needed for the setup of the regulation model. Based on that quantitative regulation model was developed, which was validated on the euro area or world data depending on applicability and availability. In the case of Latvia, for the first time in the Latvian banking sector, the regulation intensity and the equilibrium point between the deadweight loss and regulation costs were assessed.