Dexia, the stricken Franco-Belgian lender, loaned €1.5bn ($2bn) of fresh capital to its two largest shareholders, which then used the cash to buy Dexia shares before 2008, an unorthodox funding move that at the time raised the Belgian regulators’ concerns.
The arrangement amounted to Dexia borrowing money from itself to finance a capital increase, an illegal move in most jurisdictions and now banned under European Union rules, but not explicitly illegal under Belgian law at the time.
The arrangement artificially increased the bank’s regulatory capital levels, which are closely watched by regulators and investors to gauge a lender’s financial strength.
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