Financial arms races are scarcely a new phenomenon. How different history might have been had Chuck Prince heeded JP Morgan’s words from a century earlier: “I made a fortune getting out too soon”. Although not new, the liberalisation of financial services over the past 30 years, and the accompanying increase in financial scale, has probably increased arms-race pressures. As banks have piled on the pounds, their fights on the beaches have intensified. The stronger those competitive forces, the quicker an arms race escalates. In what follows, I discuss three examples of modern-day arms races in the financial sector: races in return, races in speed; and races for safety. These are examples from the past, present and future respectively. In each, a competitive battle for relative dominance results in an evolutionary equilibrium which is sub-optimal, individually and socially. They are latter-day tragedies of the financial commons. ************ By any historical metric, the pre-crisis period was an extra-ordinary one for the financial sector. This is no better illustrated than in the returns to financial sector labour and capital. Between 1989 and 2007, the nominal gross value added of UK financial intermediaries rose more than threefold, or by about 8% on average per year. Over the same period, value-added of the non-financial corporate sector rose by about 5½% per year. More commonly-used performance measures in banking are returns on equity and executive compensation. These rose even more dramatically over the period. Returns on equity for UK banks rose from on average 1% in 1989 to 38% by 2007.
For a fund such as the Government Pension Fund Global, it is important to be able to stick to the fund's long-term investment strategy in times of turmoil. Changes to the fund's strategy are subject to thorough analysis and political anchoring in the Storting. This governance structure has served us well, and I am sure that it will continue to do so in a more challenging world. With that, I will pass you to my colleague. 2/2  BIS - Central bankers' speeches