Banking supervision is based to a large extent on the prudential regulation of banks, which is aimed mainly, but not exclusively, at promoting the financial soundness of banks and of the banking system as a whole. In order to fulfil the responsibility for systemic protection of the banking system, bank supervision must ensure the prudential soundness of participants in the banking system.
As soon as a bank failure could cause a systemic problem, the prudential and systemic measures pertaining to the supervision of banks converge. If a large bank is in financial difficulty, the expectation of losses may become so widespread that the public loses confidence in the banking system as a whole, causing withdrawals of deposits and general liquidity problems in the banking system.