Financial market is extremely important for the proper functioning of the economy. Experience of many countries in the world shows that failures in this market could lead to serious social consequences affecting, most probably, every citizen. This situation has pushed governments to act and introduce regulations aimed at preventing crisis arising from failures in the financial market. Over the years the extent of the regulations has risen significantly, especially after crises in recent decades. On the other hand, it is important to promote competition, which as per Smith leads economic system towards equilibrium and is considered as the basic building block of modern market economies. Regulation potentially can have adverse effects on the competition, thereby it is important to find the balance between the two. Dangers from overregulation have often been put in the spotlight by market participants, mostly addressing the issue with innovations when regulations scale up. Even some regulators have warned that too complex regulation poses risks for seeing the real risks building in the financial systems. The objective (aim) of the Doctoral Thesis is to develop the regulation model to find the equilibrium point between the welfare (deadweight) loss arising from market failures and subsequent government regulation costs. Model is developed in the banking sector within the financial market. 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: (a) the Regulation intensity measurement scale, (b) the methodology for the deadweight loss (information asymmetry, market power imbalances, negative spillovers, market abuse and others) assessment and (c) the methodology for the government regulation costs’ (regulatory costs, compliance costs, indirect costs) assessment. Model 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. The Doctoral Thesis has been written in English and comprises of 144 pages, not including 7 annexes. The Doctoral Thesis contains 38 tables, 36 figures and 65 formulas, while the bibliography lists 238 reference sources.