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Modification to capital controls – Loan Repayments across banks

Posted by (Author) on March 29th, 2013 - 7 Comments
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We propose a modification to the current capital control restrictions decided last night (March 27th) by the Cyprus Central Bank and the Ministry of Finance. We propose the following:

  1. Money transfers should be allowed from one bank to another, if and only if, they will be used to repay (part of) loan balances.
  2. Certificates of deposits (i.e. maturing in 1, 3, 6, 12 months e.t.c.) can be used to repay outstanding loan balances.
  3. Eliminate any penalties for early repayment of loans, or for removing money out of the certificates of deposits to pay off (parts of) loans.

The suggested modifications will help in the following way:

  1. People are given the right but not the obligation to repay their loans from existing deposits. For example, if people have savings (deposits) in Bank A that they would like to transfer to Bank B (i.e. where their loan of their primary residence is) they should be allowed to do that. We encourage people to think of their working capital needs (i.e. how much money they will need) over the next few months and then, if they choose to, they can use some of their savings (from Bank A) to repay their loans (in Bank B). Please note that people who have deposits and loans in the same bank are allowed to do that, under the current capital controls (as of March 27th, 2013).
  2. If people choose to repay their loans then banks will be able to reduce their risk-weighted assets (i.e. the estimated total value of their non-performing loans) given that we are expecting a deep recession. Therefore, banks should have incentives to remove all penalties, as stated above.

In conclusion, we think that the above measures give people the option to remove a future debt burden, if they wish to, while simultaneously helping banks to reduce their recapitalization needs.

The suggested modifications above are consistent with our proposal made on March 23rd, 2013: point 7 in “Proposal to address the current crisis in Cyprus”:

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2238380.

Alexandros Apostolides3, Alexandros Michaelides1, Andreas Milidonis1,  George Nishiotis1, Marios Zachariadis2, Stavros Zenios1

1 Department of Accounting and Finance, University of Cyprus

2 Department of Economics, University of Cyprus

3 Department of Accounting and Finance, European University Cyprus

 

Categories → Οικονομία

7 Comments
  1. avatar
    Lilian on March 29, 2013 - (permalink)

    I thank the members of the University of Cyprus Academic Initiative for their efforts and determination to counsel the government at this critical point, and while this is not a direct comment to the proposed economic advise, but given the seriousness of this forum, I would like to propose the following: That the government of Cyprus takes the European Central Bank / Troika to the European Court on grounds of purposefully (or negligently) destroying the economy of an EU member by threatening to withdraw ELA within an unreasonably short time frame, resulting into an unprecedented act of human rights violation against the people of Cyprus and risk plunging the nation into a humanitarian crisis of immeasurable proportions.

  2. avatar
    Anonymous on March 29, 2013 - (permalink)

    I would also add the following. Investigation should also take place on whether the ECB provided liquidity to the Laiki bank using as colateral inegible assets as guarantee. 9 billion euros debt to the ecb would suggest that a min of 11 bilion euro assets had been given as by laiki as colateral.

    A list of what this assets where should be given to the public. If the ECB acted out of regulations entraping the goverment should be examined.

    The same goes for the BOC.

    http://www.ecb.int/mopo/assets/standards/nonmarketable/html/index.en.html

    The above is a link to ecb showing a summary of the criteria for ecb eligible assets non marketable.

  3. avatar

    Το περί δικαίου αίσθημα του λαού πρέπει να ικανοποιείται πάντοτε. Δεν χωρεί εξαιρέσεις ούτε και καθυστερήσεις. Η όποια ανακριτική επιτροπή διοριστεί, ειδικά όταν αποτελείται από αδιαμφισβητήτου εντιμότητας και ικανότητας νομικούς ή και άλλους, σίγουρα θα πράξει το καθήκον της. Φοβάμαι όμως ότι τούτο δεν είναι αρκετό. Η τεχνικές της απόκρυψης ιχνών και στοιχείων που επιχειρούνται από τους απατεώνες, ειδικά απ’ αυτούς που έχουν σχέση με την εξουσία και την δημόσια διοίκηση, έχουν εξελιχθεί πολύ και υπερβαίνουν τα όσα γνωρίζουν οι έγκριτοι δικαστικοί όπως και οι περισσότεροι από εμάς. Γι’ αυτό, είναι αναγκαίο να κληθούν και διεθνούς κύρους ανακριτές και ντετέκτιβ ειδικοί στα οικονομικά εγκλήματα για να βοηθήσουν την διερεύνηση των όποιων εγκλημάτων έχουν διαπραχτεί είτε τούτα έγιναν από τραπεζικούς είτε από πολιτικούς, δημοσίους λειτουργούς και άλλους. Για να συρθούν οι Αρπαξάπαντες ενώπιον της δικαιοσύνης.

  4. avatar
    Vasso Ioannidou on March 30, 2013 - (permalink)

    One concern I have with the proposed measure 2 is that allowing people with both deposits and loans to use their deposits to repay their loans allows essentially that group of the population to get their deposits out of the banks. This is not the case for people with deposits but no loans. So this measure redistributes more of the pain to the latter group.

    Also if the former group is composed with a segment of the population with lower default probabilities (which is not unlikely) this would lead read to a worse composition in the loans of banks (as those that are more likely to repay their loans will be out) which will have to be absorbed by depositors that are locked-in.

    • avatar
      Vasso Ioannidou on March 30, 2013 - (permalink)

      Let me also add the following:

      Deposits of individuals with loans could instead be used as collateral on their loans and be subject to any additional possible haircuts like deposits of people without loans.

      • avatar
        Ashamed on March 30, 2013 - (permalink)

        if you have put collateral cash instead of real property to obtain a loan you should not end up being worse off. It is counterintuitive to get punished twice: give cash collateral and see your money whipping out.

        The haircut solution is not ideal for anyone. We are discussing allocation of risks between depositors which is an awkward discussion by definition. Who would have ever thought of this discussion?

        A depositor without any loans will see part of his deposits becoming a shareholding. A depositor with an equivalent amount of loans will see part of its deposits becoming a shareholding and will also owe money to the bank. If the number of shares issued represents a fair exchange of the haircut I can’t see why repayment shifts risks.

  5. avatar
    Vasso Ioannidou on March 30, 2013 - (permalink)

    I am not sure about the collateral argument I mentioned above (still thinking about it and I am not convinced myself). But I am pretty sure about the 2 implications of the netting argument mentioned above.

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