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Sprinklers: The Buffers Needed to Make Buildings Resilient

12 April 2021

RECENTLY, AN article authored by Lars Rohde (the Governor of Denmark’s National Bank) was published in The Financial Times and highlighted the fact that a bank’s capital buffer should work much like a sprinkler system. In other words, writes Iain Cox, 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 that a bank or a building are back up-and-running within a short period with limited financial impact or damage. 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 that will help in saving a building?

Established 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 due to a financial crash or episodes such as the COVID-19 pandemic. The problem is that many banks are unable to use these buffers because they will fall foul of other regulatory requirements. Consequently, the buffers cannot fulfil their purpose.

Therefore, a regulatory system designed in response to a financial crash doesn’t have the outcome people expect for key assets. Reading this across to changes in the 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.

Today’s fire safety regulations can lead to outcomes where such key buildings are totally lost to a fire and that end result is deemed a “success” as long as no-one’s hurt. The property is not a key consideration of the regulations. Therefore, people follow regulations and, following Rohde’s line of thinking around the buffer, sprinklers are not installed.

Building Regulations will not protect property from being lost in the event of a fire. Key stakeholders are then surprised by the outcome with the loss of homes, workplaces and community assets.

History lessons

Rohde is clear that it’s better to have sprinklers than let your building burn, and and that it’s also better to have a Fire and Rescue Service attend the blaze rather than let the fire spread to other buildings.  In the article, Rohde states: “When the fire alarm sounds, you want the sprinkler to start before the fire trucks arrive” and goes on to say: “The destruction caused by a great fire is simply too large, as history has shown.” The thing to do is to make sure that you’re deriving the outcome you want. That means putting the incentives in the right place.

Rohde comments: “A prudent society may still want an insurance policy against potentially disastrous rare events.” So, in point of fact, what he’s saying is that you need sprinklers, you need a Fire and Rescue Service and you need insurance. They’re not mutually exclusive and there’s a hierarchy.

Sprinklers are a buffer that render a fire in a building a non-event. We all hear about big fires. We hear about a company’s insurance not being enough to cover the costs, but what we don’t hear about are companies who barely have a hiccup in their day-to-day existence because sprinklers have worked to contain a potentially disastrous fire and allow business to continue.

Ultimately, we’re looking for people to make informed decisions on the outcome they desire from a building over its life, including shock events like fires. However, all-too-frequently that view is focused on the cost of developing the building. Such a focus means that the long-term view is often not discussed.

The incentives are bringing about the wrong outcome. In other words, you have to make sure the incentives are tuned to bring about the outcome you want rather than the outcome you derive.  

The Financial Times article scripted by Lars Rohde is a timely reminder that, as regulations impacting the fire sector change, we need to ensure we keep our focus on the desired outcome. Otherwise, the unintended consequence may see the delivery of outcomes that no-one will view as a success when those regulations are tested by a serious fire or a banking collapse.

Iain Cox is Chair of the Business Sprinkler Alliance 

*For more information about the Business Sprinkler Alliance visit the www.business-sprinkler-alliance.org