Cash-strapped banks in Cyprus should be allowed to fail, Adam Lerrick of the American Enterprise Institute told CNBC on Thursday.
Lerrick, a banking expert who was in Cyprus to speak at a conference, told "Squawk Box" he would recommend an orderly restructuring of the troubled banks.
"The banks would be closed for two days," he said. "What would come out is when they reopen … The small depositors would be fully protected. The large depositors would be the owners of a bank."
"The banks [there] would be solvent," he continued. "The banks could be highly capitalized and they would then have access to the ECB for refinancing to provide any liquidity."
The European Central Bank has set a Monday deadline for Cyprus to agree to a bailout plan, threatening to cut off funding to its banks.
(Read More: ECB to Cyprus: You Have Four Days to Strike a Deal)
Cyprus has faced the prospect of bankruptcy since Tuesday when its parliament voted unanimously against a levy on bank deposits to raise $7.51 billion demanded by the European Union under a $12 billion rescue plan.
(Read More: Blackmailed' by EU: EX-Cypriot Central Banker)