from the early 1970s up until 2007 marked another watershed. financial liberalisation took hold in successive waves. since then, finance has comfortably outpaced growth in the non - financial economy, by around 1. 5 percentage points per year. if anything, this trend accelerated from the early 1980s onwards. measured real value added of the financial intermediation sector more than trebled between 1980 and 2008, while whole economy output doubled over the same period. in 2007, financial intermediation accounted for more than 8 % of total gva, compared with 5 % in 1970. the gross operating surpluses of financial intermediaries show an even more dramatic trend. between 1948 and 1978, intermediation accounted on average for around 1. 5 % of whole economy profits. by 2008, that ratio had risen tenfold to about 15 % ( chart 2 ). internationally, a broadly similar pattern is evident. in the us, following a major decline during the great depression, the value added of the financial sector has risen steadily since the end of the second world war. as a fraction of whole economy gva, it has quadrupled over the period, from about 2 % of total gdp in the 1950s to about 8 % today ( chart 3 ). similar trends are evident in europe and asia. according to data from the banker, the largest 1000 banks in the world reported aggregate pre - tax profits of almost $ 800 billion in fiscal year 2007 / 08 ( chart 4 ), almost 150 % higher than in 2000 / 01. this equates to annualised returns to banking of almost 15 %. some of these trends in the value added and profits of the financial sector, and in particular their explosive growth recently, are also discernible in the market valuations of financial firms relative to non - financial firms. total returns to holders of major banks ’ equity in the uk, us and euro area rose a cumulative 150 % between 2002 and 2007 ( chart 5 ). this comfortably exceeded the returns to the non - financial economy and even to some of the more riskseeking parts of the financial sector, such as hedge funds. to illustrate this rather starkly, consider a hedged bet placed back in 1900, which involved going long by £100 in financial sector equities and short in non - financial equities by the same amount. chart 6 shows cumulative returns to following this hedged strategy. from 1900 up until the end of the 1970s, this bet yielded pretty much nothing, with financial

john gieve : sovereign wealth funds and global imbalances speech by sir john gieve, deputy governor of the bank of england, to the sovereign wealth management conference, london, 14 march 2008. * * * introduction much of the debate on sovereign wealth funds ( swfs ) has focused on political questions : do they reintroduce the failings of public ownership into market economies by the back door, will swfs use their ownership rights to pursue political ends, and will resistance to foreign ownership lead to a new wave of protectionism. i want to concentrate today on some economic issues : why have they become so prominent recently, how does that relate to imbalances in the world economy, how are they affecting financial markets and what are the policy implications of their growth. background but first let me set out some of the background. there is no off the shelf definition of an swf. what i have in mind is a government investment vehicle that manages foreign assets with a higher risk tolerance and higher expected returns than for central bank foreign currency reserves. 1 the size of such funds is hard to measure, but may be in the $ 2 - 3 trillion range. origins of swfs investments by swfs are one type of capital flow between countries so they have always been closely related to global imbalances in trade. when countries run surpluses on their current account, they generate equal and opposite net capital outflows of one sort or another and those capital flows produce an investment income. that has been the story of the uk economy over the last 150 years. we ran continuous surpluses in the 50 years before the first world war ( chart 1 ) and built up a large stock of foreign assets. partly as a result of that, we benefited from a surplus on our investment account for most of the period since the 1870s. there are two key differences between that period of the uk ’ s investment abroad and the situation today. 100 years ago the developed countries were investing in emerging markets ( at the time in the americas and australia ) which had abundant land and natural resources but scarce capital and so the returns were high. currently, capital is flowing “ uphill ” from emerging to mature economies. secondly, the investors before were mainly in the private sector and were seeking out the best returns on capital. today the investors are mainly eme central banks and governments and the build up of foreign assets reflects their policy choices. there is some fuzziness at the edges of this definition. central bank reserves in