right size ” that if we look at some of the world ’ s largest banks, this subsidy amounted in the period between 2002 and 2007 to around half of post - tax profits. when the financial crisis erupted, this implicit subsidy became explicit and was equal to more than post - tax profits. by comparison, the value of the subsidy exceeds the amount spent globally each year on development assistance ( see http : / / www. bankofengland. co. uk / publications / pages / speeches / 2012 / 615. aspx. however, this subsidy does not go to the needy. figures for the us show that ceos of the largest investment banks earned 500 times the median us household income in 2007, a ratio that has increased fivefold since 1989. andrew haldane discussed this recently in a speech “ a leaf being turned ” ( see http : / / www. bankofengland. co. uk / publications / pages / speeches / 2012 / 616. aspx ). nevertheless, basel ii gives banks ample leeway to determine their own capital requirements. in 2007, the swiss bank ubs held usd 50 billion in us cdos, but the bank believed that these were risk - free, since the paper had the highest rating from the rating agencies and the bank had also purchased credit default insurance. thus, the bank did not have sufficient capital reserves to cover any losses on this portfolio ( gillian tett ( 2009 ) : fool ’ s gold ). andrew haldane ( 2012 ) : “ the dog and the frisbee ”, speech at the federal reserve bank of kansas city ’ s 36th symposium ‘ the changing policy landscape ’, jackson hole, wyoming ( see bank of england website ). swings of the pendulum are a frequently used metaphor in studies of financial crises. see, for example, michael d. bordo ( 2003 ), “ market discipline and financial crisis policy : a historical perspective ”, in market discipline in banking : theory and evidence. research in financial services : private and public policy, volume 15, 157 – 182, edited by george g. kaufman, elsevier publishers. according to bordo, the pendulum swings between measures to prevent crises, manage crises and resolve crises. erik f. gerding ( 2006 ), “ the next epidemic : bubbles and the growth and decay of securities regulation ”, connecticut law review, shows how economic upswings are often periods of deregulation and overoptimism in securities markets,

capital may only be spent over the central government budget. the act prohibits using the fund ’ s capital in any other way. once a year, the government authorities decide in accordance with the act how much of the fund may reasonably be used. all use of central government funds is thus subject to the same assessment and alternative uses must be weighed against one another. the background material for the act relating to the petroleum fund clearly indicates that the fund shall not be a second central government budget and, by implication, shall not be used for investment or spending that have not received priority in the budget. the chart shows the share of the central government ’ s annual net cash flow from petroleum activities that has been transferred from the fund to the fiscal budget. since 1996, a considerable portion of the petroleum revenues has been retained in the fund. in 2000 and 2001, there were almost no transfers from the fund to the fiscal budget while in the past two years the share transferred to the fiscal budget represented about one - third of the cash flow. see act relating to the government petroleum fund, adopted on 22 june 1990 and amended by act no. 2 of 16 january 2004. the petroleum fund has become large. at the end of the second quarter of 2005, the market value of the petroleum fund ’ s portfolio was nearly nok 1 200 billion or approximately eur 150 billion, or roughly 65 per cent of gdp. the ministry of finance has defined a clear mandate for norges bank ’ s management of the petroleum fund. norges bank shall seek to achieve an excess return in relation to a benchmark portfolio by means of active management within a certain risk limit. the chart shows developments in both the average annual net real return and the real return without the contribution from active management. returns have fluctuated considerably since the petroleum fund made its first investments in equity markets in 1998. since 1998, the first whole year the petroleum fund invested in equities, the annual excess return from active management has been close to half a percentage point. the corresponding krone amount is about nok 18 billion. petroleum revenues generally involve substantial, but uneven currency inflows into norway. the currency flows might have resulted in a strong krone and large variations in the exchange rate. the petroleum fund acts as a buffer and dampens the wide fluctuations in the krone exchange rate that petroleum revenues might otherwise have generated. an increase in petroleum revenues will result in higher capital outflows from the petroleum fund. operators in the foreign exchange market may