CORRECTED - OFFICIAL-UPDATE 1-Nowotny: No need to bypass banks on credit
* Nowotny sees no need for ECB to bypass banking channel
* Contrasts recent comments from Bundesbank's Weber
* Too early to think about adding to covered bond plan
* CEEU situation now stabilising
(Corrects references to allocation of covered bond spending after Austrian central bank says it will be based mainly on a country's capital key, but not entirely)
VIENNA, July 6 (Reuters) - ECB Governing Council member Ewald Nowotny appeared at odds with his Bundesbank counterpart Axel Weber on Monday, insisting there was no need to bypass the banking channel to ensure credit reaches firms and consumers.
He also said it was too early to consider scaling up the ECB's 60 billion euro ($83.87 billion) unorthodox plan to buy up mortgage and public sector-backed debt.
Nowotny who heads Austria's central bank, said he saw "no necessity" to bypass banks to kick start the flow of credit. "For banks, it is in their own interest to provide credit," he told a news conference.
Data continue to stoke concerns the finances of firms and consumers are being strangled as banks rein in lending. Banks hoarded a record amount of cash at the ECB figures revealed on Monday [ID:nFAT004776] and growth in lending has slowed to an all-time low. [ID:nLU302287]
ECB President Jean-Claude Trichet again urged banks to lend over the weekend. [ID:nL5643198] Nowotny's comments also put him at odds with authorities in Germany.
Bundesbank President Axel Weber has raised the prospect the ECB could circumvent the banking sector altogether if lending doesn't free up.
German Finance Minister Peer Steinbrueck piled on further pressure over the weekend, saying the government would sit down with the Bundesbank and come up with a solution unless there was a turnaround from banks. ID:nL5164229]
Overnight deposits at the ECB spiked after the bank poured 442 billion euros into money markets on June 25. Nowotny shrugged off worries that banks may hoard the funds, rather than lend it.
"A strategy of taking money from the ECB and then putting it back into the deposit facility can only be short-term," he said
It is also too early to think about scaling up the ECB's 60 billion euro kitty to buy covered bonds.
"I expect that it will increase credit... we will look at the development over the summer and then have a review in the autumn. It's too early to speculate about further steps," Nowotny said.
CEEU STABILISATION
The ECB kicked off the 60 billion euro buy on Monday but many of the details surrounding the plan remain a mystery.
The Austrian central bank backed recent comments from Italian monetary sources, that the 60 billion total would be split based on the amount of Eurosystem capital countries have.
"It is mostly divided according to the ECB's capital key, but not only according to it," a spokesman for the Austrian central bank said.
Nowotny said earlier the bank would "participate on a substantial scale," but declined to comment on how much it would spend.
Nowotny, who took the top job at the Austrian central bank last year, also touched on the ongoing worries for hard-hit central and eastern European economies.
"We see no substantial risks for (emerging European states) that are members of the European Union; for the others it needs to be viewed differently," he said.
"We assume that central and eastern European countries are of course impacted by the current economic downturn, but we also believe that there are signs of stabilisation in some areas."
Austria's banks remain highly exposed to the situation having lent there heavily during boom years earlier in the decade. Nowotny said Austrian banks would see their Tier 1 capital ratios drop to just over 5 percent unless they raised cash. [ID:nL6147440] (Reporting by Boris Groendahl, writing by Marc Jones; editing by David Stamp)
