The Bank of England is close to agreeing a plan designed to ease the mortgage funding drought.

It is understood that the Treasury is close to finalising a scheme under which the Bank would allow lenders to swap their mortgage-backed assets for government bonds rather than cash. Lenders would be able to use the gilts as collateral for loans from other banks. It is hoped that the move will ease the seizure in the credit markets and lead to a drop in mortgage rates for homeowners.

Sir John Gieve, Deputy Governor of the Bank of England, said: “We have taken and will continue to take measures to try to ease the liquidity pressures in the financial sectors.”

There is speculation that an announcement could be made early next week when Alistair Darling is scheduled to meet the Council of Mortgage Lenders. Lenders have been calling for more help from the Bank for months. Last week Stephen Crawshaw, chairman of the CML and chief executive of Bradford & Bingley, said that mortgage lending could halve this year unless the Bank widened the scope of its help.

A Treasury spokesman said: “Everyone knows we’ve been saying for some time that more needs to be done to support liquidity in the market. As the Chancellor said a few days ago: ‘We will look at market-led initiatives to improve liquidity in the mortgage-backed securities market. We will consider options for . . . improving the robustness of the market’. We have been working closely with the Bank of England to examine the options.”

More radical proposals that could allow banks to issue new tranches of highly rated mortgage-backed securities to secure additional funding, rather than using existing assets, may also be under close examination.

In response, stocks in several of the top ten mortgage lenders, including Royal Bank of Scotland, Barclays and Alliance & Leicester, rose by 7 per cent or more, boosting the value of the banking sector by £7 billion. The FTSE 100 ended up 139.3 points at 6,046.2, its highest close since February 26.

In an additional attempt to try to curb the spiralling interbank lending rate, the British Bankers’ Association (BBA) has brought forward a review of the rates amid increasing concerns about the credibility of the information supplied by international banks to set them.

The BBA, which is in charge of setting the London Interbank Offered Rate (Libor), said yesterday that it had started its annual review of the rate-setting process three weeks ago. The review is not normally done until June.

A spokesman said that unprecedented volatility in credit markets meant that Libor was coming under greater scrutiny than ever. Libor is used to help to set everything from payments on personal loans to the terms on billions of dollars of complex derivatives trades. The BBA wants to ensure that Libor continues to be a “transparent, objective, accurate rate”, the spokesman said.

The BBA’s review coincided with comments from a Credit Suisse executive that the credibility of Libor had been severely weakened by the credit crunch. Paul Calello, chief executive of the Swiss bank’s investment bank, told an International Swaps and Derivatives Association meeting that “continuing to base an enormous amount of derivatives contracts on an index with credibility problems is a serious issue we must address”.

Libor rocketed during the credit crunch as banks hoarded cash. But there are fears that banks have played down the true rates at which they have been borrowing to prevent Libor from soaring further and triggering panic about a possible bank collapse.

Yesterday three-month sterling Libor eased slightly to 5.92 per cent from 5.93 per cent and the overnight sterling rate fell from 5.095 per cent to 5.086 per cent.