UPDATE 2-Bank of Canada names insider economist as deputy governor

* An academic who came up through the ranks

* Will focus on financial system activities

* Has written papers showing benefit of flexible FX

By Randall Palmer

OTTAWA, Feb 21 Larry Schembri, a Bank of Canada economist with international expertise, will become one of the central bank's deputy governors on its rate-setting council starting next week, the bank said on Thursday.

Schembri, 55, is an academic who currently coordinates the bank's contributions to the Financial Stability Board of the Group of 20 leading economies. He will replace Jean Boivin, who moved to the finance ministry. Schembri's appointment is effective next Monday.

The bank has still to replace Governor Mark Carney, who will leave on June 1 to head up the Bank of England starting in July.

"Larry's expertise of monetary theory and policy in open economies, and profound understanding of the international monetary system make him an exceptional addition to governing council," Carney said in a statement.

"Furthermore, his dedicated efforts in recent years in support of the bank's financial stability function have contributed greatly, not only to the bank, but also to the important work of the Financial Stability Board."

In addition to the governor and senior deputy governor, the governing council has four deputies.

The Bank of Canada is more of a closed shop than other western central banks. Its top officials aim to speak with one voice and it does not release minutes that would indicate if they are hawkish or dovish, though an insider could be seen as less likely to rock the boat.

"He's a long-time serving member of the Bank of Canada, an internal appointment, so probably we can't expect to see too much of a change in terms of how that will impact policy at the central bank," said Mazen Issa, macro strategist at TD Securities.

"The bigger question that still remains unanswered is who will take the reins, who his boss will be."

The central bank has advertised for Carney's position and a special committee of the Bank of Canada's board of directors has the task of compiling a list of potential candidates. Tiff Macklem, currently the senior deputy governor, is considered the front runner.

Schembri joined the bank in 1997 as a visiting research adviser in the International Department, where he later became research director. In 2005 he was appointed chief of the International Economic Analysis Department until his appointment to the current position of adviser in September 2010.

He has a Master's degree in economics from the London School of Economics and Political Science, and a doctorate in economics from Massachusetts Institute of Technology.

Schembri has published many academic articles and working papers, including a number on the benefits of flexible exchange rates. But his writings appear to give few hints as to his views on monetary policy.

He will help oversee the bank's financial system activities, along with Deputy Governor Tim Lane, while Deputy Governors Agathe Cote and John Murray will oversee the bank's analysis of domestic and international economic developments in support of monetary policy decisions.

This marks a shift for Cote from the financial system side to the economic analysis side, where she replaces Boivin.