Alistair Darling is today expected to announce an unprecedented £50bn bail-out of Britain's banks to kickstart the mortgage market and prevent its collapse.
The Chancellor will tell MPs this afternoon that the Bank of England is to allow lenders to swap their assets - ie mortgage debt - for secured government bonds to stave off the housing market from plunging into a full-blown crisis.
Tomorrow, Mr Darling is due to meet representatives from the High Street banks to urge them to honour their side of the deal - to pass on interest rate cuts so that more money is placed in homeowners' pockets.
A senior Treasury source told The Herald: "He is not putting a pistol to their heads. It's a difficult situation. We will continue to help, and what we are saying to the banks is that we would like them to do what they can to help the punters."
Explaining the Bank's move, the Chancellor told the BBC: "What it will do is effectively lend banks money to unfreeze the situation we have got at the moment."
Fears have persisted that the proposal will simply mean the taxpayer will take on the banks' risks but the Chancellor stressed: "It will be lending the money, so it's got to be repaid, and we will take securities in return for it. But the idea behind it is that it will open up the market ...which will help householders."
Mr Darling, who said the financial turmoil caused by the credit crunch was "an unprecedented shock to the system", described his proposal as an"essential step in trying to get the financial market stabilised", which in turn would help the mortgage market. He also called for banks to begin disclosing their losses.
This week, the Edinburgh-based Royal Bank of Scotland is due to announce a share issue of up to £12bn, the largest in British history, to help repair its financial base hit by the credit crunch. Other banks are likely to follow suit.
Last night, board members were said to be considering the fate of Sir Fred Goodwin, the bank's Chief Executive, as reports suggested RBS is deliberating whether or not to sell its insurance arm for up to £5bn in a further bid to ease its liquidity problems.
In London, while the Bank and the Treasury has been tightlipped about the details of the Whitehall plan, it is thought the package will involve swapping £50bn of gilt-edged government bonds for mortgage-backed securities.
The arrangement is intended to run for just in excess of a year and will involve valuing at a discount the less-liquid securities the Bank takes on. This will free up bank balance sheets so that more money can be lent to consumers suffering the effects of the economic downturn, characterised by falling house prices and soaring oil and food prices.
Last week, retail figures showed like-for-like sales in British shops fell for the first time in two years and during last month at the quickest rate in almost three years as consumers cut back on luxury goods such as electronics.
Last night, Vince Cable for the Liberal Democrats said: "It is obviously necessary for urgent action to be taken to unblock the mortgage market and to break the crippling effects of the credit crunch.
"However, we cannot have a situation where the banks are able to privatise their profits and nationalise their losses."
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