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Scheme for emergency bank funds is unveiled

The Bank of England and the Treasury have revealed plans for an emergency bank funding scheme to kick-start lending to households and businesses.

In speeches at the annual Mansion House event, the Bank's governor Sir Mervyn King and Chancellor George Osborne announced they were working together on a "funding for lending" proposal to ward off a worrying new phase of the credit crunch.

Under the proposals, British banks - facing higher funding costs and under pressure to put more capital aside - will be offered vital funding at low interest rates.

But the funding will be linked to bank lending performance in what marks a direct attempt to free up the log-jam in credit hitting the economy.

The scheme is expected to be in place within a few weeks and will last for four years.

"Today's exceptional circumstances create a case for a temporary bank funding scheme to bridge to calmer times," Sir Mervyn said.

The governor also said the Bank would be activating liquidity facilities worth at least £5bn a month that were first announced last December to help pump cash into the system.

The Chancellor said: "We are not powerless in the face of the eurozone debt storm."

He added: "The government - with the help of the Bank of England - will not stand on the sidelines and do nothing."

Andrew Tyrie, chairman of the Treasury Select Committee, wrote in an article in The Times that the banking sector was still "dysfunctional" and was stifling growth for small businesses.

Last night he said: "The measures look as if they will encourage lending to businesses by ensuring liquidity is more easily available to banks.

"These are exceptional circumstances. They require exceptional measures."

Yesterday's moves follow calls for action from the Bank and Treasury to do more to help banks and steer the UK economy through the eurozone crisis.