Britain on Monday announced its second package of measures, including an insurance scheme to protect banks from 'toxic debts', and to boost lending by the battered banking sector.
Unveiling the measures, Chancellor of Exchequer, Alistair Darling said the measures were needed because if the banking system collapsed, the economy 'would come down with it'.
The measures include a scheme to offer insurance against banks losing more money from the toxic debt that started the credit crunch.
The government has also agreed to change the terms of its rescue of Northern Rock and RBS Group.
Under the insurance scheme, banks would agree with the government the amount they expect to lose from particular debt. The banks will have to pay for the insurance, but the government said that it does not expect to be paid in shares.
The Treasury will then sell insurance against about 90 per cent of the institutions' additional losses from the debt.
Most of the debt involved is very difficult to value because the market in it has collapsed.
The government hoped that by insuring them against additional losses, it will encourage the banks to resume normal lending to businesses and individuals.
Chancellor Darling said banks taking out the insurance would have to make 'very specific legally binding agreements to lend more money'.
New measures came after a first package last October.
But Chancellor Darling also indicated that the regulation of the banking sector might be reviewed, stating that 'in the world we're living in just now we do need to look again at the way we supervise and regulate these banks'.
The latest deal with the banks would require the taxpayer to pour billions of pounds into the troubled banks in the form of guarantees for new lending and the purchase of a range of loans and other assets now on their books, in addition to the 37 billion pounds pledged in October.
Details of the package include the extension of the 250 billion pounds credit guarantee scheme announced with the last package of measures in October until the end of this year.
The Bank of England will set up a special fund to buy high quality loans and other assets direct from the banks, to be funded by the Treasury, with an initial 50 billion pounds set aside.