Banking supervision and the politics of verification: the 2014 stress test in the European Banking Union

Abstract

The statistical methodology known in financial terminology as ‘stress testing’ was used by the European Central Bank in 2014 in order to assess the solidity of the banks in the eurozone. This audit process is analysed here as a problem of truth production or ‘veridiction’ in the sense developed by Michel Foucault in his 1978–1979 lectures at the Collège de France. In order to prove effective, the stress test had to deliver knowledge on banks, objectified and actionable at once, but also controlled by the idea of avoiding ‘market panic’. This epistemological dilemma is at the core of the politics of verification, which consists in the distribution of restraint and responsibility between non-risky and risky banks. This qualitative investigation is focused on France and is based on interviews with relevant policy actors and documentary analysis.

Keywords:

• financial regulation
• European Banking Union
• stress test
• audit
• veridiction
• governmentality

Acknowledgements

For their feedback on earlier drafts, I would like to warmly thank Fabian Muniesa, Horacio Ortiz, Marie-Claude Violle, Marion Fourcade, Benjamin Lemoine, Vincent Gayon, Philippe Bezès, Martin Lodge, Lydie Cabane, Brice Laurent, Başak Saraç-Lesavre, Marie Alauzen and Quentin Dufour.

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

1 In 2014 and 2015, I carried out 25 interviews with highly ranked officials working at the Banque de France, at the Direction Nationale du Trésor and at two investment banks headquartered in France. Furthermore, I was a participant observer for three months at the Banque de France, within a department directly involved in the ECB comprehensive assessment. I examined relevant documentation, including memos and guidelines related to the ECB comprehensive assessment.

2 Article 6(4) of the Single Supervisory Mechanism (SSM) regulation, that allows the ECB to organize the stress testing, determined the target set of banks according to the size of their balance sheet, i.e. the total value of the bank’s assets ought to exceed 30 billion euros, or the ratio of the bank’s total assets to the GDP of its country ought to exceed 20 per cent (unless the total value of their assets was below 5 billion euros), or the institution was among the three largest credit institutions in a participating SSM member state, regardless of size.

3 The indicator used to assess the solidity of the banks in the stress tests is called the capital adequacy ratio. This capital ratio was introduced by the Basel II accord in 2004 and reinforced by Basel III in 2010. This ratio is a measure of the relation between common equity capital and risk-weighted assets (which is itself a measure of the risk taken by a bank per portfolio, and consists in translating the value of the bank’s assets into capital that can potentially be lost).

4 In 2008 the European Commission asked Jacques de Larosière, former director of the IMF and governor of the Banque de France, to draft a policy report on the 2007 financial crisis. Jacques de Larosière recommended the intensification of the influence of the European agencies in banking supervision (De Larosière, 2009).

5 The Basel II option that allowed the banks to measure their risks taken through the development of their own idiosyncratic risk systems (e.g. what we call the IRB approach) was authorized in Europe but not in the United States. The USA did not follow the Basel II agreement.

Additional information

Funding

This research has been funded by a doctoral grant from Mines ParisTech.

Notes on contributors

Alexandre Violle

Alexandre Violle is a PhD student at Mines Paristech (Centre for the Sociology of Innovation). His dissertation topic is the European Banking Union, and his research focuses on the instruments used by the European Central Bank to supervise and control financial risks taken by eurozone banks. His fields of interest lie within science and technology studies, economic sociology and the anthropology of finance.