ECB mulls new loans to banks, with conditions - paper

A structure showing the Euro currency sign is seen in front of the European Central Bank (ECB) headquarters in Frankfurt July 11, 2012. REUTERS/Alex Domanski

FRANKFURT (Reuters) - The European Central Bank is considering a new long-term liquidity operation available only to banks that agree to use the funding to lend to businesses, a German newspaper reported on Wednesday, citing sources.

ECB President Mario Draghi and other Governing Council members have repeatedly mentioned the option of conducting more liquidity operations, or LTROs, to help the fragile euro zone economy and ensure the flow of credit to the private sector.

The ECB extended more than one trillion euros ($1.36 trillion) of cheap three-year loans to banks through two long-term refinancing operations in late 2011 and early 2012.

But this time, an option under consideration is that the banks would have access to funding via the LTRO only if they agree to pass on the money in loans to industrial, retail and services businesses, Sueddeutsche Zeitung reported on Wednesday.

The new LTRO could also run for only nine or 12 months, the paper said.

The news came after ECB policymakers said last week they were open to taking fresh measures to support the euro zone economy, where inflation is running well below target.

Excess liquidity - the amount of money in the market beyond what banks need for their day-to-day operations - has now fallen back to its lowest level since September 2011 as banks repay the huge twin LTROs early.

A Reuters poll of money market traders this month said an LTRO could happen in the first quarter of 2014.

The ECB is also considering other possible measures to support the economy after this month's decision to cut its main interest rate to a record low 0.25 percent.

Governing Council member Jens Weidmann said earlier this month the ECB must ensure its lending operations do not become too generous.

Another ECB hawk, Executive Board member Yves Mersch, said on Tuesday the ECB's scope for action is limited and its policy of providing banks with more liquidity than they need should not become a permanent feature.

In keeping with the ECB's eagerness to see credit flow to businesses and households across the euro zone, Mersch also pressed banks on Tuesday to lend money.

"Let me add in this context, that also with respect to our most recent monetary policy decisions, it is now up to the banks making use of the favourable financing condition that we provide, passing this on to households and firms to ultimately revive the flow of credit in the euro area," he said.

"The ball is in the court of the private sector and the euro area governments."

(Reporting by Victoria Bryan; Editing by Catherine Evans)