Achieving a safe and efficient financial intermediation in Central and Eastern Europe (CEE) is a complex matter. This paper first supplies a conceptual framework for the analysis of prudential regulation, and derives a number of implications for capital adequacy requirements, balance sheet adjustments, and accounting. It also discusses political economy issues and the question of whether large banks are really "too big to fail." The second part of the paper summarizes the situation in CEE and establishes a list of specificities of the banking environment there. It then reviews some major policy questions in the light of these specificities.