The Government has today announced a new bank bailout, financed by the taxpayer, as part of a last ditch attempt to get banks lending to customers again.
Any losses they suffer will be transferred from the banks to the taxpayer with the scheme expected to operate for a least five years.
"To increase confidence and capacity to lend, and in turn to support the recovery of the economy the Government is today announcing its intention to offer protection on those assets most affected by the current economic conditions," the Treasury statement said.
The Chancellor could not estimate how much the bailout would cost, but said a 'reasonable cap' would be in place.
Initially, the scheme will be open the major British banks, but it could be extended in the future to the British subsidiaries of foreign banks.
This exchange of shares to guarantee bad debts could mean the Government has a stake in the UK's four largest banks for the first time.
The taxpayer has already taken a bigger stake in RBS to around 70% as the bank announced the biggest loss in British Corporate history of £20bn today.
The Government is also offering to increase its stake in Lloyds Banking Group and Barclays could be next on the list as the bank was forced to pre-announce significant profits in a bid to halt its plummeting share price which fell by 20% on Friday.
The new bail-out is the second in three months for the banks after October's £500bn injection. If it fails to stimulate lending, nationalisation of the banking sector may be the only option, experts warn.
Chancellor Alistair Darling told the BBC that banks taking out the insurance would have to make "very specific legally binding agreements to lend more money".
Later today, the Treasury is also expected to announce further measures to help borrowers including plans to make government bonds available to banks to support £100m of loans for home owners and small business.
It will also extend its £250bn Credit Guarantee Scheme until the end of the year to support lending between banks.
In an expansion of the Bank of England's £200bn Special Liquidity Scheme, consumers' car loans will be accepted in exchange for Government bonds.
Finally, Northern Rock will be told to offer more home loans in a turn around from previous instructions to offload mortgage customers.
Bank share prices had a mixed reaction to the news of the bail-out with Barclays up 15.90p to 113.90p while RBS fell 8.00p to 26.70p. Lloyds is up 1.70p to 100.10p but HSBC fell by 2.50p to 533.25p.
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