When America sneezes, England catches cold. Nowhere has this axiom more aptly demonstrated than the ongoing financial crisis initiated by the housing market meltdown in the US and the subsequent sub-prime mortgage crisis. Although the effect on English financial institutions have been markedly less than the travails assailing American banks, they are serious nevertheless.

In a move reminiscent of the US Federal Reserve's injection of $200 billion into the financial system in early March, unconfirmed reports say that the Bank of England is also planning to provide around £50 billion or $100 billion of support to British banks and lending institutions.

This assistance would be in the form of government bonds to swap the banks' mortgages. These bonds would have a maturity of up to a year, but would be rolled over for up to three years, and are expected meet banks' demands for longer term loans, without being accounted for in the national debt.

If and when announced, it will be the biggest ever special initiative by the British monetary authorities to supply liquidity to the British banking system. The announcement is expected towards the end of next week.

Commercial banks have been asking for longer term finance from the Bank of England to fill their funding gap following the collapse of the market for mortgage-backed securities last August. Even as late as the first half of 2007, British banks raised £60 billion from the sale of mortgage-backed securities but next to nothing since then.

The disappearance of this market deprived banks of tens of billions of pounds of finance for mortgage lending and is one of the main reasons why the cost of mortgages for many home owners has been rising, although the central benchmark rate is quite low at present.

Even as the central bank keeps the benchmark rate low at five per cent, the prevailing sentiment that high-risk mortgage debt is lurking on banks' balance sheets has driven the interest rates at which they lend to each other to well above that figure, in turn raising borrowing costs for households and companies.

This in turn has led to a general slowdown in the nation's economy, with some analysts fearing the onset of a recession. With general elections by May 2010, Gordon Brown's new Labour government is anxious for things to improve and consumption to increase, for which it wants to ensure that borrowers are not priced out of the market.

This is especially relevant at a time when banks have announced intentions to halve lending this year. Also, it is expected to prevent a repeat of the Northern Rock debacle in February which forced the nationalisation of the revered bank. (See: UK decides to nationalise ailing bank Northern Rock)

The new plan is expected to allow banks to temporarily swap mortgage-backed securities for government bonds to help free up their balance sheets and allow them to lend more to consumers, as well as to each other.

The Royal Bank of Scotland, the UK's second-largest bank after HSBC, is expected to announce a rights issue next week to shore up its battered balance sheet. The timing of the issue is considered to be arranged to coincide with the central bank's expected announcement around that time.

The current bailout is not without some concerns, however. Opposition parties may very well criticize this Treasury of creative accounting, by keeping the bonds out of national debt with a lending facility of three years while limiting the maturity period to one year.

If the Treasury had chosen the simpler route of issuing bonds of two-year and three-year maturity, the new bonds would have been part of the national debt under accounting standards. However, this in turn would have contravened fiscal rules led down by Gordon Brown himself when he was Chancellor of the Exchequer under Prime Minister Tony Blair. Bonds with a maturity of less than one year, issued in what is known as a "repo" operation, do not count towards the national debt.