How the £50bn aid package pans out

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The scheme will allow banks to strengthen their finances by swapping some of their riskier mortgage-backed assets for Government bonds.

Bank of England Governor Mervyn King said the scheme "is designed to improve the liquidity position of the banking system and raise confidence in financial markets".

As the credit crunch has tightened, banks have become reluctant to lend to each other. This has led to higher mortgage rates and stricter conditions for borrowers because less money is moving around the financial system.

King said the plan is highly unlikely to put taxpayers' money in jeopardy. The Bank insisted "the risk of losses on the loans they have made remains with the banks". They will only be able to swap packages of mortgage-backed assets created before the end of last year, which should ensure they do not use the new facility to create new lending. But the special liquidity scheme, as it is called, could run for up to three years.

The scale of the aid package has not been fixed. The Bank expects initial demand to be around £50 billion but has set no cap on its support. The window for swaps opened today and will remain open for six months.

Banks using this facility will have to pay the Bank a fee related to Libor, the rate at which banks lend to each other. This would currently be about 1%. If the scheme succeeds, Libor should drop closer to Bank Rate at 5% and the fee could fall to its minimum of 0.2%.

The Bank will make the banks take a "haircut" in that, for example, if they supply £100 million of AAA-rated UK residential mortgage-backed securities it will let them have between £70 million and £90 million of bonds. Northern Rock is specifically excluded.