A recent Financial Times article, written by the Governor of Denmark's National Bank, Lars Rohde, highlighted the fact that a bank's capital buffer should work much like a sprinkler system. In other words, it exists to ensure a bank can continue to provide credit in times of crisis, much like a sprinkler contains a fire prior to the arrival of the Fire and Rescue Service. Essentially, they both buy time, ensuring a bank or a building are back up and running within a short period with limited financial impact or damage. But how come the banking sector can appreciate the need for a buffer yet so many people and businesses fail to see sprinklers as the much-needed buffer to help save a building? Set up in the wake of 2008's financial crisis, capital buffers enable banks to use their liquid assets in order to meet unexpected changes in cash flows whether a financial crash or, as we have now, the COVID pandemic. The problem is that many banks are unable to use these buffers because they will fall foul of other regulatory requirements. The buffers, consequently, cannot fulfil their purpose. A regulatory system designed in response to the financial crash therefore does not have the outcome people expect for key assets. Reading this across to the change in fire safety regulation, we have to ask the same question as to whether they will deliver the outcomes we expect for key societal, economic and environmentally important buildings.
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