The Banking Executive Magazine - May 2021

Capital Control gency assistance, within the frame- work of the ECB Emergency Liquidity Assistance (ELA) program. The latter has granted troubled banks in Greece liquidity assistance as cash loans against collateral that may be covered bonds or government bonds. ELA loans are meant to run for a limited period and provide lim- ited sums. However, over the course of Greece economic and banking crisis, the ECB Governing Council has repeatedly raised the ceiling on total ELA loans available to Greek banks. The ceiling now stands at around 90 billion euros. In order to ensure that Greek banks remain liq- uid, the government of Greece im- posed the capital controls putting limits on the amount of money that people can withdraw from their ac- counts or transfer to banks outside Greece. Capital Control Measures The capital controls imposed in Greece were similar to the ones im- plemented in Cyprus. However, the situations of the two countries were different. Cyprus has substantially re- covered from the economic depths it faced in the aftermath of the 2008 global financial crisis, but Greece did not recover. In the case of Greece, the dilemma is whether the country will or should remain a member of the European Union. As long as Greece remains dependent on emer- gency loans or transfers, the durabil- ity of its membership in the EU is uncertain. ICELAND CASE STUDY Iceland is another country that im- plemented capital controls. Follow- ing the 2008 crisis, Iceland imposed strict controls on the movement of money out of the country. In some ways it was in a worse situation than Cyprus. Its banking sector amounted to 10 times GDP compared with eight times in Cyprus. Capital con- trols similar to the ones implemented in Cyprus were in place for five years in Iceland. Businesses were nega- tively impacted because few foreign firms were investing in the country. If they make any profit they cannot get their money out. Also, foreign work- ers were discouraged and decided to go back home and people in Iceland who want to work abroad must get clearance from the government. Following the capital controls in Ice- land, the reconstruction of the bank- ing sector created more well-capitalised and profitable lenders. The clean-up of the financial services sector allowed the creation of new banks from old ones, and the economy was growing and resolving its debts related to the banking crash. ISSUE 149 MAY 2021 the BANKING EXECUTIVE 11