UPDATE 1-Weidmann says hard to steer banks' use of ECB loans

Fri Dec 20, 2013 3:27am EST

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FRANKFURT Dec 20 (Reuters) - The European Central Bank should not interfere in banks' business decisions and take on too big a role in deciding which projects are worth getting bank loans, ECB Governing Council member Jens Weidmann was quoted as saying.

At the same time, were the ECB to give banks more long-term loans, it should ensure that the money is not just used to buy government bonds, Weidmann told German weekly Wirtschaftswoche in an interview to be published on Saturday, parts of which were made available to news agencies on Friday.

Many analysts expect the ECB to conduct more long-term refinancing operations (LTROs) next year. It lent banks more than 1 trillion euros ($1.4 trillion) for 3 years in twin operations in late 2011 and early 2012.

ECB policymakers have floated the idea that any further such loans could be tied to them being lent on to the real economy, but ECB President Mario Draghi has said it could be difficult to find the right way of doing so and that the central bank needed to think deeply about it.

"I am in principle sceptical of the central bank being called upon to try to fine tune regional and sectoral lending," the Bundesbank chief told Wirtschaftswoche.

"Central banks should not intervene in banks' business decisions to channel loans into certain regions or to certain borrowers."

Bank lending has decreased in many crisis-ridden southern European countries.

Lamenting the fact that banks had used the bulk of the cheap loans from the ECB to buy government bonds, the Bundesbank chief said this should be avoided in future.

"In any potential future operations, we should seek to avoid this," Weidmann told Wirtschaftswoche. "The simplest and most coherent way to do this would be by pricing, which would make such carry-trades unattractive," he added, but did not give details on how this could work.

Weidmann also said the deflation risk in the euro zone was very limited. Even in the debt-ridden countries where inflation is currently negative, there is no self-reinforcing deflationary spiral, he added.

The ECB was ready to act if needed, the Bundesbank head said, but added that traditional instruments were less effective as interest rates were already close to zero.

The ECB cut its main refinancing rate to 0.25 percent in November. Its deposit rate has been at zero since July last year. Cutting it into negative territory could backfire, as it was possible that banks would pass on the costs to borrowers, Weidmann said. ($1 = 0.7316 euros) (Reporting by Sakari Suoninen and Jonathan Gould, editing by Elizabeth Piper)

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