EUROPEAN CENTRAL Bank (ECB) lending to Irish financial institutions reached €44.1 billion in July - its highest level since the credit crisis began a year ago - as banks sought extra liquidity to ease their funding difficulties.

The amount borrowed from the ECB by Irish financial institutions last month surpassed the last high recorded at the end of last year and breached €40 billion for the first time since the crisis began.

The increase emerges as the ECB says it is planning to announce changes to the rules of its money-market auctions in the coming weeks to curb the risk of abuse by banks that use various types of collateral to borrow from the Frankfurt-based bank.

Some Irish financial institutions use ECB funding regularly to finance their operations, using mortgage assets as collateral.

A spike in funding costs last December led some Irish lenders to rely more heavily on the ECB to tide them over the crucial end-of-year period. Irish financial institutions owed €39.4 billion to the ECB at the end of last year.

This figure, which includes borrowing by international banks in the IFSC in Dublin, dropped to €28.2 billion in February, but it has been steadily rising since May, as funding costs remained high.

The UK's largest building society, Nationwide, said last week that it was planning to expand into Ireland to take advantage of "funding opportunities".

The building society will be able to access ECB funding by taking savings in euro from customers and establishing an operation within the euro zone.

ECB council member Yves Mersch said at a meeting of central bankers organised by the US Federal Reserve in Jackson Hole, Wyoming, that the bank had been discussing the use of central bank funding and had agreed on a "certain amount" of refinement to the existing rules. "At the margins there can still be cases where you see dangers of gaming the system," said Mr Mersch.

European financial institutions have been relying more heavily on ECB funding for liquidity needs as the crisis has driven up funding costs and lenders struggle to sell on securities (packages of debt).

The ECB has grown concerned that banks are taking advantage of its collateral rules, which are broader than those used by the US Federal Reserve and the Bank of England, and that they will become overly reliant on central bank money to fund themselves.

Mr Mersch said that the bank was "satisfied with our framework" but regularly had to adjust its framework to market practices.

Natacha Valla at Goldman Sachs in Paris said the ECB would want to preserve the scope and flexibility of its system. "The problem for the ECB is that if the spirit of the system is respected, that is fine, but when banks start to use arbitrage opportunities, then it's problematic."

"The ECB is in an unenviable situation," said Paul McCulley, a fund manager at Pacific Investment Management, in Jackson Hole. "The lender of last resort should be just that, a last resort, and not a permanent provider of funds to the private sector." - (Additional reporting: Financial Times service/Bloomberg)