ECB Says Loans Swapped for Equity Still Get Special Treatment

(Bloomberg) -- Lending is lending -- even if loans are swapped for equity positions, according to the European Central Bank.

In its Governing Council decisions published Friday, the ECB describes a case it “had not envisaged” when it launched a program three years ago to offer banks free long-term funding in exchange for extending credit to the real economy.

A bank issued loans to companies and showed its expanded credit portfolio to the ECB to prove it qualifies for more favorable borrowing conditions. Interest falls below zero if banks exceed their lending benchmarks, effectively making the so-called TLTRO-II funds a source of income.

The companies receiving the loans didn’t pay them back, but swapped for equity instead. The ECB said such moves should be reported as a “reclassification” rather than a repayment of the loan, since “the amount of funding provided by the TLTRO-II participant to the real economy was not reduced as a result of these transactions.”

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