Modification to capital controls – Loan Repayments across banks

We propose a modification to the current capital control restrictions decided last night (March 27^th) 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 27^th, 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 23^rd, 2013: point 7 in “Proposal to address the current crisis in Cyprus”: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2238380. Alexandros Apostolides^3, Alexandros Michaelides¹, Andreas Milidonis¹,  George Nishiotis¹, Marios Zachariadis², Stavros Zenios^{1 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