remarks by lynn patterson deputy governor of the bank of canada investment industry association of canada and institute of international finance toronto, ontario june 18, 2018 rebooting reference rates introduction thank you and good afternoon. my topic today is interest - rate benchmarks or reference rates and the work under way here in canada and globally to strengthen them. before i plunge in, let me take you back to the 1980s. aside from the monstrous shoulder pads in my suit jackets, the decade gave us several important innovations. one of the most widely used was windows. not the kind you put in your house, but the operating system for your computer. microsoft released windows 1. 0 in 1985. most of us are now using windows 10. each new version improved functionality and reliability. the most widely used benchmark — the london interbank offered rate ( libor ) — was first published in 1986, a year after microsoft released windows. it has undergone only one material change in the past 30 years and was certainly never originally designed to support what has become a us $ 350 trillion market. now, it is difficult to imagine modern financial markets without derivatives enabled by benchmarks. 1 however, just as windows 1. 0 isn ’ t versatile enough to support new computer programs that have been introduced over the past 30 years, many benchmarks are no longer suitable for the wide array of derivatives markets they support. in addition, the scandals and mistrust related to the 1 originally developed to facilitate cross - border lending between banks, libor and other benchmarks offer measures of prevailing interest rates on which standardized contracts can be based. for example, an individual or firm may borrow money today and pay the lender interest based on market interest rates, as measured by a financial benchmark, over the course of the loan. i would like to thank paul chilcott, harri vikstedt, scott kinnear and sheryl king for their help in preparing this speech. not for publication before 18 june 2018 12 : 45 eastern time manipulation of benchmark rates for the financial benefit of individuals and institutions have made their future use unpalatable. not surprisingly, then, these problems with benchmarks have undermined confidence in their reliability and robustness. in response, global authorities are working closely with the private sector to address them. for many of you in this room, benchmark reform is probably a familiar topic, and you understand the significant role these rates play in the functioning of markets. but benchmarks, like windows,

loan losses during a slowdown. if all banks do the same, their actions will exacerbate the downturn and increase their eventual losses. it is well - known that timely and properly calibrated monetary and fiscal policy can address the first issue. it is less widely recognized that macroprudential regulation can address the second. in many ways, the central bank is ideally suited to bring a macroprudential approach to financial stability. our mandate demands that we take an economy - wide perspective. further, we have a strong motivation to maintain a stable, efficient financial system because we rely on it to transmit our monetary policy actions. however, we do not have many of the tools necessary to secure financial stability. monetary policy is a blunt instrument, poorly suited to addressing financial imbalances. instead, macrofinancial stability should be one of the core objectives of financial regulation. until it is, under the current framework, the bank can promote financial stability through two tools : liquidity and advocacy. the bank is the ultimate source of liquidity within the economy. we have used our recently enhanced powers under the bank of canada act extensively throughout the crisis, with measures that now total more than $ 36 billion of term liquidity. there are four important points of context. first, we are not supplying net liquidity to the system – there is no new central bank money. rather, we are redistributing liquidity by exchanging liquid assets for high - quality, though less - liquid ones. second, we are substantially over - collateralized to protect our balance sheet. 3 third, consistent with canada's relatively strong banking system, our liquidity provision has not been as large as elsewhere. for example, the bank of canada is currently providing liquidity equivalent to around 1 per cent of total domestic banking assets. the comparable figures are 4 per cent in europe, 5 per cent in the united kingdom and 6 per cent in the united states. finally, while the provision of extraordinary liquidity by central banks is limiting the damage from the crisis, it has long been apparent that official liquidity, irrespective of size, cannot re - open markets on its own. the bank's second tool – advocacy – has not received the same profile as the first – a fact i hope to begin to change today. the bank can promote financial stability by influencing public sector policies and private sector behaviour. we do this in two ways ; by leveraging our for example, at