Listen up: BofC deputy governor has an important, if arcane, topic on her mind as retirement looms

Listen up: BofC deputy governor has an important, if arcane, topic on her mind as retirement looms
Bank of Canada deputy governor Lynn Patterson is leaving the institution in a blaze of glory, at least by the standard she set for herself during six years of public service.

Patterson, the former Bay Street executive who joined the central bank in 2013 as an advisor before ascending to the Governing Council the following year, announced in May that she planned to retire. Her last day is July 19.

The former head of Bank of America Merrill Lynch’s Canadian operations joined the Bank of Canada when the institution was opening up. But Patterson kept it old school, avoiding public attention to the greatest extent possible: she kept her speaking engagements to a minimum and turned down interview requests. With a week left in her tenure, her only public interaction with reporters had occurred in March, after she delivered one of the central bank’s formal economic updates in Hamilton, Ont.

That reluctance is why I was unsure I had understood correctly when the Bank of Canada informed a handful of journalists on July 16 that a 40-minute briefing in which Patterson had just participated was on the record and not simply for our edification. The Globe and Mail’s representative double-checked, and I triple-checked later by email.

We’d heard correctly. On her way out the door, the media-shy Patterson decided to deliver some news on how the Bank of Canada intends to correct one of the biggest flaws exposed by the financial crisis. Her willingness to allow her name to appear in the media probably should be viewed as an indicator of how seriously she and the central bank take this development.

You will have noticed by now that it’s taking me a long time to get to the news. That’s because I decided to risk condemnation from my old journalism teachers and back into this story since the natural headline would only resonate with the occupants of certain office towers in downtown Toronto.

Patterson’s announcement was that the Bank of Canada had decided it will take over administration of a revamped Canadian Overnight Repo Rate Average (CORRA) as soon as the second quarter of next year.

If you are member of the real economy, and the significance of this switch is lost on you, think back to all those stories about how traders colluded to manipulate the London Interbank Offered Rate, or LIBOR, which set the price for tens of trillions of dollars’ worth of short-term lending.

The LIBOR scandals did a lot to fuel the post-crisis backlash against Big Finance, and global authorities have been working on giving themselves more control over the system since 2013 or so. The Bank of Canada’s decision to take control of what it hopes will become the basis for most short-term lending in Canadian dollars is its contribution to bringing a level of trust back to global financial markets. That matters because trust correlates with stability and lower borrowing costs.

“If central banks are administering the rate, then they have a high level of comfort and understanding as to how that’s being calculated and that the data can be reliable,” Patterson said. “So, I think it all kind of goes hand in hand with the reforms that we’ve seen that have been articulated for a number of years now.”

If central banks are administering the rate, then they have a high level of comfort and understanding as to how that’s being calculated and that the data can be reliable

Lynn Patterson, outgoing deputy governor, Bank of Canada

There remains work to do. Despite the stigma, bankers still cling to LIBOR, even though authorities have made it clear they intend to bring about its end. The British banking regulator has said that it will, after 2021, no longer insist financial institutions supply the quotes that support LIBOR, and the United States, United Kingdom and Australia are among the places that have recently set up alternative benchmarks.

“We need a mindset shift where firms realize that every new U.S. dollar LIBOR contract written digs a deeper hole that will be harder to climb out of,” John Williams, president of the Federal Reserve Bank of New York, said on July 15.

CORRA is relatively little used at present. A separate standard, the Canadian Dollar Offered Rate, or CDOR, tends to set the standard for the vast majority of Bay Street’s short-term lending.

Patterson said she thinks the industry in which she has worked for a quarter century will come around.

The Bank of Canada assembled a committee of more than a dozen financial institutions to figure out how to make CORRA the basis for risk-free lending. That work is scheduled to be completed in the first half of next year. The result should be a truer gauge for the price of money because it will be based on more trades. The benchmark will also exclude transactions that could be driven by factors other than market price, such as trades between a financial institution and its investment-banking arm.

By “we,” Patterson of course meant the colleagues she will be leaving behind and whoever Governor Stephen Poloz finds to replace her, which will be a challenge. There are lots of good candidates, but few of them are women, so the Governing Council probably is about to become less diverse, and study after study shows that diverse groups make better decisions. It will also be difficult to find someone with the experience and skill that Patterson brought to the table, as bankers tend to balk at the relatively meagre wages the public tends to pay its servants.

I’m told Patterson made an above-average contribution. She will be missed, even though few of us got to know her.

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