Britain on Thursday announced plans to provide the country's banks with cheap funding in an effort to stimulate lending and resuscitate its ailing economy.
Finance Minister George Osborne and Bank of England boss Mervyn King told business leaders in London that they were working together on a "funding for lending" scheme, utilising the government's favourable borrowing rates.
"Today's exceptional circumstances create a case for a temporary bank funding scheme to bridge to calmer times," King told the audience at central London's Mansion House.
The country's banks, which are hamstrung by high borrowing costs and increased capital buffers, will be able to receive cheap funding if they can prove they are lending out sufficient amounts to households and businesses.
It is hoped that the scheme, which is expected to be in place within a few weeks, will help clear the blockage in credit lines which has hampered the country's recovery from the 2008 financial crisis.
"A lack of credit is damaging businesses and costing jobs," Osborne told the audience.
"But in a period of financial stress, when private sector confidence is low, we can also use the credibility of the public sector balance sheet to support investment and the flow of credit now," the chancellor of the exchequer added.
"I can tell you today that the governor and I will take coordinated action on liquidity and on funding for new bank lending in order to inject new confidence into our financial system and support the flow of credit to where it is needed in the real economy.
"The government -- with the help of the Bank of England - will not stand on the sidelines and do nothing as the storm gathers," he stressed.
The British government enjoys unusually low borrowing costs as investors see its bonds as a safe haven from the eurozone crisis.
They believe that Britain's ability to print its own money means it is unlikely to default, despite its high levels of indebtedness.
King also revealed the BoE would activate measures announced in December which it is hoped will provide liquidity of at least £5 billion-a-month ($7.7 billion, 6.15 billion euros).
Osborne argued that his fiscal austerity drive had helped keep Britain's borrowing costs down, and that high inflation meant he would not be loosening the policy any time soon.
However, he did announce that the BoE's Financial Policy Committee (FPC), which is responsible for monitoring Britain's economy, will now need to prove its policies are compatible with economic growth as well as stability.
Turning to Europe, the finance minister renewed calls for a eurozone banking union which could pool risks and resources, but insisted Britain, which does not use the euro, would not be part of it.
Osborne earlier published a key document outlining plans for costly structural reforms of Britain's banks in a bid to help avoid a repeat of the 2008 crisis.
"The government has today published a White Paper setting out proposals to fundamentally reform the structure of banking in the UK," the Treasury said in a statement.
The document, which precedes an act of legislation, would be open to consultation until September 6, it added.
Central to the changes are plans to "ring-fence" the retail operations of lenders such as HSBC, Barclays and state-rescued Royal Bank of Scotland and to require them to hike their capital reserves -- all by 2019.
According to the White Paper, British banks should increase their capital buffers above levels decided under the international Basel III agreement.
Vickers last year estimated that the annual pre-tax cost to lenders of the reforms would total between £4.0 billion and £7.0 billion a year.
Analysts said the higher charges risked being passed on to clients.