Regulating banks and avoiding “unrecoverable errors”

Colin Dyer
Chief Executive Officer
Jones Lang LaSalle

The theme of confidence continued to resonate among the dozens of people I’ve spoken with in the last 24 hours. That’s encouraging for business prospects in general, and for our business in particular, in terms of driving demand for real estate of all sorts over the next 24 months.

I shared the optimism on recovering real estate markets during an interview with CNBC this morning.

Regulating the Financial Services Industry: TBTF & SIFIs

I said yesterday that there has not been much talk in the corridors about regulating the financial services industry, and indeed the general business person views it as yesterday’s problem. That topic was on my agenda today, however, because I wanted to find out what was going on around the regulation process in the banking industry. Banks and the supply of credit are so fundamental to building and trading assets in our real estate industry.

So I was lucky to be invited to breakfast meeting of 35 very, very senior bank executives and central bankers who discussed recent developments in the regulatory world. The good news is that a lot has been done. Sets of regulations known as Basel III, for banks, and Solvency II, for insurance companies, have been agreed and are currently being implemented.

But I did learn that they think that there is still an awful lot of work to be done. In many areas, these senior people recognize that they still have significant control challenges, and they are in the process of discussing the right path forward through incredibly complicated problems in interlinked markets.

Some examples of the areas they think still need regulation:

• How do you deal with financial institutions that are ‘too big to fail’ (TBTF)?
• How do you identify ‘systemically important financial institutions’ (SIFIs), which are capable of bringing down the financial system?
• How – and how much – do you regulate the non-bank sector: hedge funds and others which are major sources of capital?
• How should regulators evaluate bank trading book risks, and how much capital should they be required to hold against them?
• Macro-Prudential Regulation. No idea what this is, but it’s big and it’s coming

All of this says that, whilst some progress has been achieved, there are still broad areas where the banking industry realizes that things still need to be done, but where progress is not yet evident.

And, in addition to all the above, regulators still largely operate on a national basis. All the people at today’s meeting were concerned that cross-border alignment of regulations hasn’t really been worked out, and needs to be.

An Exciting Moment

Midway through the banking session, there was a very loud bang, and the floor shook in the hotel meeting room where we were gathered. Hotel management evacuated everybody, only to send us back in fairly shortly. We were told that the heating boiler had blown up. But we later learned that a left wing group had detonated a ‘small’ explosive device next to the heating system, hoping to shake up the UBS Board.

Thinking about it, for a terrorist who had problems with the world banking system, that was a pretty attractive target. As our Australian colleagues would say “It’s a dangerous job, but someone has to do it”

So paradoxically the next session I participated in was on risk management.

The Unrecoverable Error: How to Avoid It

I joined the CEO of Bain Capital and Mark Carney, Governor of the Bank of Canada, on a panel asked to explore ways to avoid or reduce the impact of severe economic, social or environmental shocks on company performance.

In my comments, I talked about the risks we actively manage in our business and the methods and processes which we use to deal with them. I discussed some of the internal risks we face – managing risk around our IT systems and commercial risk in the valuations and project and development work which we do for clients, for example. I also talked about external risk: how we dealt with the financial crisis, for example, and how we respond to natural disasters impacting the real estate we manage on behalf of our clients.

You all know it, but the keys which we rely on to handle crises – internal or external – are transparency and openness within the firm, superior internal and external communications, and a strong sense of personal and company ethics. In fact the biggest risk to our business is reputational, so we strive at all times to act in a way that our reputation remains intact.

I also talked about how risk can be created through the real estate system. Real estate price bubbles have been at the source of almost every banking crisis. So we in real estate are both the source and the victims in times when these markets collapse. Mark  Carney, the central banker, wondered if there are some clear measures which would put us in a position to identify when there is a bubble, and that might be able to raise the alarm before a crisis actually strikes.

Carney also described how the financial system manages risk. He made the point that coordination between the central banks to handle risks in the financial system was poor three years ago, but has advance hugely since the crisis. That’s encouraging news for all of us.

China Comment

At dinner this evening, a Chinese client said proudly that China has its first woman finalist at a tennis grand slam, the Australian Open. The press asked Li Na what had driven her so far through the competition. ”The prize money,” she said.

Looking Ahead

Sustainable real estate will be high on the agenda tomorrow, when I chair a session on opportunities and challenges surrounding retrofit financing. The real estate and construction companies participating will explore options for financing projects that improve the energy efficiency and sustainability of existing buildings, which comprise 98 percent of the building stock in developed countries.

Finally, “Notes from Davos” has apparently ‘scooped’ The New York Times. In yesterday’s entry, I wrote how Apple’s iPhones and iPads were winning the competitive war against Blackberry. The Times’s Dealbook only covered the story this morning!

That is all for today. Breakfast tomorrow is at 7.00 with the CEO of Dassault Systèmes, a client in Boston, Paris and hopefully other places soon.

Best regards,

Colin Dyer

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Categories: World Economic Forum 2011