The Banking Executive Magazine - May 2021

Capital Control only in an emergency case of serious economic and financial difficulties. Restrictions may be applied only for a limited time to enable businesses to regain access to needed capital as quickly as possible. Some analysts considered capital control measures implemented in Cyprus as non-compliant with Euro- pean Union monetary rules. Capital controls in Cyprus were subject to legal challenges.as they violated ar- ticles 63 and 65 of the EU treaties that stated that capital controls could only be justified on grounds of public policy or public security and that measures should not constitute a mean of arbitrary discrimination or a disguised restriction on the free movement of capital and payments. The urgent necessity of the capital control Without restrictions on the move- ment of money, Cyprus authorities feared that the scale of capital flight would destroy banks in the country. Deposit accounts were loaded with foreign money, which in the case of some banks were taxed at 40%. Spending limits for tourists Cyprus desperately needed tourists and to help tourists and citizens short of cash, the authorities increased the daily ATM withdrawal limit from € 100 to € 300. Impact on businesses Large firms in Cyprus were obliged to get clearance to pay their workers and must apply for a licence from the central bank to import goods and services. If they have cash in Bank of Cyprus they lose 40% of their funds over € 100,000, while deposits in other Banks were taxed at 80%. De- posits of more than € 100,000 at some banks were frozen. As a result, purchase of overseas services were impacted. Duration of the capital controls The government initially planned the capital controls for four days. But this was a short period for banks or gov- ernment finances to be in good shape. The controls stayed in place for quite a long time in Cyprus, and were only gradually withdrawn over a two-year period. The last of them was lifted in April 2015. Indirect capital control In addition to direct capital controls, there were also indirect ways of con- trolling the movement of capital in Cyprus. For example, transfers to for- eign bank accounts were charged a special transfer tax, which tends to discourage transfers. The bailout Cyprus received a € 10bn bailout from the European Union and Inter- national Monetary Fund after its biggest banks nearly collapsed in 2013. Cyprus Popular Bank (Laiki Bank), was wound up and deposits worth more than € 100,000 in the largest bank, Bank of Cyprus, were seized. GREECE CASE STUDY In 2013, Cyprus showed that capital controls are useful in crisis preven- tion and can help in recovery. This was an example to follow by other countries. As such, Greece imposed restrictions on withdrawals of money from Greek bank accounts, and on fi- nancial transfer out of the country. Key Facts Greek had bank run problem during its financial crisis that started in late 2009. Similar to the case of Cyprus, nervous depositors were lining up to withdraw cash from Greek ATMs in the face of interlinked sovereign debt and banking system solvency crises. Many Greeks now prefer to keep their money at home, in cash, rather than in a bank. Help from the European Central Bank Greek banks had to turn to the Euro- pean Central Bank ECB for emer- the BANKING EXECUTIVE 10 ISSUE 149 MAY 2021