Libra and banking

Libralised finance

What Facebook’s new currency means for the banking system

Safe for now

CONSUMERS WILL probably view holding Facebook’s new currency, Libra, as an alternative to putting money in the bank. If they see it as an attractive alternative, Libras could proliferate. If every Westerner held in Libra an amount equal to one-tenth of their bank deposits today, the new currency outstanding would be worth over $2trn. How worried should banks be?

At first pass, Libra looks like a banking system of sorts. The “Libra Reserve” will hold enough liquid safe assets to back every Libra it issues. A staunch minority of economists has for decades called for this sort of arrangement—dubbed “narrow banking”—to replace the existing “fractional reserve” model, under which deposits at banks are backed by mortgages and other illiquid loans. Narrow banks, they argue, would not suffer runs. On the surface, the only obvious difference between the Libra Reserve and a narrow bank is that the former will hold assets denominated in a variety of (still-to-be-specified) currencies.

Yet look closer and the Libra Reserve will not be a bank, narrow or otherwise. Some of the safe assets it holds will themselves be deposits in fractional-reserve banks. It will not…