Q: Why do we need the new bailout?

A: The Government says the new package of measures will help to reinforce the stability of the banking system, get the banks lending again and ultimately help the stalled economy.

Since 2007, banks have stopped lending individuals, companies and to each other in what is known as the "wholesale" banking market, on fears that if they loan funds to a rival which then goes bust it could leave the original lender nursing significant losses.

Banks, already reeling from the collapse of Northern Rock in September 2007, were given a further jolt when Lehman Brothers collapsed in September 2008. Since then, the credit markets have remained frozen

Q: What is in today's package of measures?

A: At the heart of the bailout is an insurance scheme.

This is designed to give banks reassurance that even if one of their rivals, which they may have lent money to, announces very bad losses, those losses will be guaranteed by the Government, safeguarding against a collapse.

If banks know the Government will guarantee a lender's losses, they will be more willing to lend money to each other.

Banks will pay a fee to take out an insurance policy with the Government.

The Treasury and the banks involved will identify about £120 billion of bad loans. Between them they will come up with valuations for the loans, which may prove controversial and time-consuming.

The Government will then insure any losses below this valuation, although the banks will have to take the first 10 per cent of any losses to give taxpayers a buffer.

Only when a borrower defaults on payments will the guarantee apply.

Today's scheme also includes a plan by Sir James Crosby, the former chief executive at HBOS, to kick-start mortgage lending.

The Bank of England will extend its sovereign guarantees to new types of mortgages held by banks. This is supposed make them easier for banks to sell them on to other investors at a reasonable price, thereby freeing up new cash for banks to lend on new mortgages.

Northern Rock, the state-owned mortgage lender, has been given extra time to repay its loans to the Government. This should allow the bank to lend more money to people who want mortgages and possibly slow repossessions

A new role for the Bank of England.

Britain's central lender will be able to buy as much as £50 billion of high quality assets from companies other than banks and financial institutions to help improve liquidity.

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