Bank of Canada Seeks to Expand Market Intelligence Team

  • Deputy Governor Lynn Patterson comments in Ottawa interview
  • Strained bond, housing markets top list of emerging threats

Canada’s central bank is planning to expand its contacts within the financial industry to help it better gauge new risks to the system.

Bank of Canada Deputy Governor Lynn Patterson, a former investment banker, said in an interview Wednesday she expects to grow the central bank’s “market intelligence” team responsible for keeping in touch with traders, asset managers and other industry players.

Lynn Patterson
Lynn Patterson
Photographer: Patrick Doyle/Bloomberg

The focus on building closer ties with the industry -- a global trend among central banks -- reflects the growing complexity of financial products and increased concern less-regulated participants are taking on more risk, through a range of activities from securitization to home lending, as capital rules tighten on traditional banks. Canada’s shadow banking industry was pegged at about 40 percent of gross domestic product at the end of 2012.

“While banks are materially safer than they were before the crisis, we know that risk has been transferred and it now sits in other places, so from our vantage point it makes it a little more difficult to assess and determine where the risks are,” Patterson said at the bank’s headquarters in Ottawa.

Emerging Risks

Increased deal-making outside traditional networks, government bonds that have become harder to trade and strains in the housing market are also emerging risks.

The bank has six staff on its market intelligence team, with as many as 30 others contributing on a part-time basis. The Ottawa-based institution has stepped up its market monitoring in recent years, and Governor Stephen Poloz now holds semi-annual press conferences about risks to financial stability. The next one is scheduled for June 9.

The information gathered from market intelligence informs decisions on the central bank’s trend-setting interest rate, how it runs bond auctions for the federal government and shapes advice to other regulators.

“A really important aspect of how we watch and monitor financial markets is our market intelligence activities,” Patterson said. “If anything we will probably be looking to enhance them even further in the future.”

Patterson, former Canadian head of Bank of America Merrill Lynch, became a deputy governor at the central bank in 2014 and splits her time between Ottawa and financial hub Toronto. She also co-chairs a recently created group aimed at streamlining operations in the Canadian bond market.

Liquidity Disruption

More than half of investors in an October survey said the ease of trading benchmark federal government bonds was “reduced somewhat” in the last two years, and 62 percent said the ease of trading corporate debt was “reduced significantly.”

Some of the disruption in bond liquidity may be part of the normal credit cycle, Patterson said. “When markets hit rough patches, liquidity always kind of disappears,” she said. “Is it really any different now?”

The bond market panel was created “to make sure that everyone understands what are the issues,” she said.

The biggest risk the central bank has identified to financial stability stems from hot housing markets such as Vancouver and Toronto, and Patterson said recent rule changes to ease strains in the housing market “are all helping.”

Single-family homes in Vancouver and Toronto routinely fetch more than a million dollars. A growing economy and constraints on the supply of land for development explain part of the price increase in Toronto, Patterson said. Canada’s federal housing authority reported last month there’s “strong” evidence of overvaluation in both those cities.

“We are certainly seeing in the Toronto area this creep of increased prices,” she said. “It’s kind of echoing out more from the city to the Hamilton area and others.”

On the central bank’s own policy overnight interest rate, Patterson reiterated that “we don’t need to go to negative interest rates, yet it is an important tool for us to consider within the context of a number of different tools.” The Bank’s key interest rate has been 0.5 percent since July.

The experience of other countries suggests negative rates are felt most at the “wholesale” banking level while consumers with savings accounts feel the pinch over time through higher fees rather than an explicit negative interest rate, she said.

“It would be a little bit like having a safety deposit box where you might put in a thousand dollars and it costs you thirty dollars a month to have that box,” she said. “So in effect you have a negative interest rate there, but you know, you don’t really see it like a negative rate.”

(An earlier version of this story was corrected to remove a reference to shadow-flipping in 13th paragraph.)

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