managers or the board of directors do not find out about improper conduct until it is uncovered by the authorities. rules may be followed to the letter, but not in spirit. all of this increases misconduct risk and potentially damages the firm and the industry over time. like other forms of tangible and intangible capital, firms must invest or its capital will deteriorate over time and adversely impact the firm ’ s productive capacity. to be clear, cultural capital is not loss absorbing like equity capital, but it can be loss preventing by influencing decisions, behaviors, and outcomes over time. market failures and misconduct risk if this is the case and misconduct risk is bad for the firm, some obvious questions follow : why don ’ t firms invest in cultural capital and reduce the risk themselves? why do regulators and supervisors need to get involved? i believe firms are ultimately responsible for these decisions and we do observe progress. many large financial firms have increased their attention to misconduct risk and cultural drivers in the wake of serious frauds and enforcement actions over the past several years. but, the degree of commitment and progress in these efforts has not been even across the industry and serious or persistent misconduct continues in some firms. so, why wouldn ’ t a firm do more? one can turn to traditional economic theory to offer an explanation for why a firm might underinvest in cultural capital. firms may operate with levels of cultural capital beneath both the social optimum and even the private optimum due to different types of market failures. today i will consider three well - known phenomenon — externalities, principal - agent problems, and adverse selection — that may explain why misconduct risk persists and why firms might underinvest in cultural capital relative to what might be socially optimal. externalities externalities are the impact that one actor has on other, unrelated actors. externalities can drive a wedge between private and socially optimally outcomes and, from a supervisors ’ perspective, lead firms to underinvest in their own resiliency by ignoring the broader impact of bad outcomes on the financial sector and the real economy. in other contexts like environmental policy, externalities such as pollution motivate government intervention. in banking regulation, externalities are the conceptual driver behind the enhanced prudential standards for capital, liquidity, and risk management that are currently applied to the largest, most systemically important financial institutions. 8 principal - agent problems principal - agent problems reflect incentives for employees to act in ways that don ’ t align with

. norway was hit by oil price shocks in the following years and economic reforms were implemented in several areas. after a period it became clear that the central government budget would be in surplus and that transfers would be made to the fund. norway ’ s experience from its first 30 years as an oil - producing nation led to the introduction of the fiscal rule, which has been a key element of norwegian economic policy for the past decade. report no. 29 to the storting of 2001 laid down guidelines for the phasing - in of petroleum revenues into the norwegian economy, establishing two main principles : economic policy must contribute to stable economic developments and be sustainable over time. by linking petroleum revenue spending to the expected real return on the fund – and not to current petroleum revenues – the fiscal rule provided for a gradual and sustainable phasingin of the revenues. if we can restrict spending to the return, the fund will never shrink. norway will also be less vulnerable to fluctuations in current petroleum revenues. ( chart 8 : effect on the size of gpfg of change in oil price and return ) in the first ten years after the establishment of the fiscal rule, the pace of the fund ’ s growth was determined by oil prices. prospects in 2001 indicated that a 25 percent higher oil price over a 10 - year period would increase the size of the fund by almost nok 800 billion. uncertainty with regard to the return on the fund was far less important for growth. this situation will change as the fund grows and oil and gas production declines. from 2020 to 2030, the oil price will play a less prominent role for the size of the fund, while the return on the fund will be all the more important. in the initial years, the actual return, adjusted for inflation and costs, was close to 4 percent. in recent years, with the financial crisis and the sovereign debt crisis, the real return has been lower, averaging about 2½ percent since 1998. source : lie, e. and c. venneslan : over evne. finansdepartementet 1965 – 1992 [ beyond our power. ministry of finance 1965 – 1992 ]. pax forlag, 2010. see report no. 25 to the storting ( 1973 - 74 ) : “ petroleumsvirksomhetens plass i det norske samfunn ” [ the role of petroleum activity in norwegian society ]. bis central bankers ’ speeches we should be careful about taking a rear -