UPDATE 1-Draghi says banks must use new four-year loans to lend

Thu Jul 3, 2014 9:19am EDT

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(Adds details of programme)

FRANKFURT, July 3 (Reuters) - Banks that do not lend after receiving cheap loans from the European Central Bank's new funding programme will be made to pay the money back, ECB President Mario Draghi said on Thursday.

"If the bank doesn't give evidence they have produced some net lending with respect to the benchmark, they will have to pay back," Draghi told a news conference after the ECB left interest rates unchanged.

The ECB is keen to avoid a repeat of what happened with its previous round of cheap funding, much of which euro zone banks used to buy up debt of their governments, tightening links between them that had proved problematic during the crisis.

Giving broad details earlier of the new TLTRO lending programme, Draghi said banks could participate either individually or as a group if certain criteria are met.

They will initially be allowed to borrow a sum equal to 7 percent of the total amount at April 30, 2014 of their loans to the euro area non-financial private sector, excluding loans for house purchases, at operations on Sept. 18 and Dec. 11.

"Banks can draw additional allowances under the programme if they generate eligible lending over the first two years of the programme in excess of a given benchmark," Draghi said.

This will be equivalent to three times the difference between their actual eligible lending and their benchmark, and can be borrowed via six TLTRO quarterly operations running from March 2015 to June 2016.

There will be different benchmarks for banks that are currently expanding their loan portfolios and banks that have decreased their lending to the real economy, although these will be harmonised after a year, Draghi said.

"By devising these two benchmarks, we took into account that for some banks deleveraging is necessary," said Draghi.

"We certainly don't want to discourage that. It is part of the adjustment process towards a more sustainable finance structure."

(Written by Catherine Evans Editing by Jeremy Gaunt)

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