Bank announces £50bn rescue package

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The move will see banks able to swap their riskier mortgage-backed assets for Government bonds to shore up their finances.

"The scheme aims to improve the liquidity position of the banking system and increase confidence in financial markets," the Bank said.

The Bank of England said the risk of losses under the scheme would be carried by the banks.

Those companies taking part will have to provide assets of "significantly greater" value than the Treasury bills they receive to avoid the taxpayer taking on the risk of potential losses.

Banks will not be able to finance new lending under the scheme, which will last up to three years.

Since the credit crunch erupted last year, banks have suffered from a crisis of market confidence in bonds secured on mortgages, due to rising defaults among high-risk "sub-prime" borrowers in the US.

This has hit banks' ability to raise funds and made them more cautious over lending to each other - leading to more expensive mortgage deals for homeowners.

The Bank said: "Financial markets are not working normally, which if left unchecked will have an impact on the wider economy. Across the world, there is a lack of confidence in assets created from packages of bank loans, most notably mortgage-backed securities."

"As a result, banks in all the major financial centres have on their balance sheets an 'overhang' of these assets, which they cannot readily sell or use to secure borrowing."