Bankers plan to tap the Bank of England for far more than the £50 billion of government securities earmarked initially for the 'special liquidity scheme' announced yesterday.

As Mervyn King, the Governor of the Bank, sought to play down the size of the scheme, insisting it was not a bottomless pit, banks said that they expected to apply for much larger sums.

“We wouldn't have sweated blood in all those meetings for £50 billion,” said one senior banker privy to the negotiations over the past four weeks.

“It'll be substantially more than that. Every single bank will bite the Bank's hand off for this.

“Every single bank will participate energetically. What people don't realise is there is an absolute drought of medium-term money.”

The Bank said that there was no official ceiling on the amount of government securities that could be supplied to liquidity-starved banks, but that it had absolute discretion to halt the scheme for any bank at any time.

It expects £50 billion to be applied for in the first two months and the application window for the scheme - under which banks can exchange illiquid mortgage-backed securities for highly liquid government bonds - will be open for six months and last for three years.

“There is no way in the world that the banks can access this as a bottomless pit,” said Mr King, adding that the scheme would not be available to failing institutions.

Andy Hornby, the chief executive of HBOS, welcomed the scheme. “This will certainly help relieve the pressure in the money markets,” he said. John Varley, his counterpart at Barclays, said: “We are very supportive of this development. It is both innovative and substantive. Barclays ... will be an active participant.”

But there was greater scepticism elsewhere. Simon Ward, chief economist at New Star Asset Management, said that the terms on which banks could borrow the government bonds were similar to those of the auction of three-month loans last autumn, which flopped.

Banks must pay a fee equivalent to the difference between three-month Libor and the interest rate for borrowing government bonds, subject to a minimum of 0.2 per cent.

Mr King, who began devising the scheme before the Bear Stearns crisis six weeks ago, said that it was intended to improve liquidity in the banking system and restore confidence.

Bank officials believe the scheme will not be inflationary, will not lift the future cost of government borrowing, and will only cost the taxpayer anything in highly unlikely circumstances.

Mr King said that the scheme was not designed to restore the mortgage markets to the “rather wild lending” seen just before the credit crunch arrived last summer. “There needs to be some adjustment to the housing market,” he added: “This scheme is designed not to impede that.”

European competition policy regulators are expecting to receive full details of scheme so they can determine whether it constitutes state aid. The Government is confident that the measures do not amount to special national aid and so do not need European Commission approval.

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