The scheme will see the Bank of England make low-cost funds available to banks and building societies, where they will be able to borrow the equivalent of 5% of the amount they currently lend.

If the banks and building societies are able to increase their lending, they will be able to borrow more from the Bank.

The Bank of England says the scheme will have strong incentives to boost lending, by lowering interest rates and increasing the availability of business loans and mortgages.

Mervyn King, Governor of the Bank of England, said: “This joint action by the Bank and the Treasury creates strong incentives for banks to expand their lending to the real economy. The more banks expand lending, the more they can use the Scheme. That will encourage banks to make loans to families and businesses both cheaper and more easily available”.

George Osborne, Chancellor of the Exchequer, added: “Today’s announcements aim to make mortgages and loans cheaper and more easily available, providing welcome support to businesses that want to expand and families aspiring to own their own home.

“The Treasury and the BoE are taking coordinated action to inject new confidence into our financial system and support the flow of credit to where it is needed in the real economy – showing that we are not powerless to act in the face of the eurozone debt storm.”