THE Bank of England said it will make more sterling available to UK banks to help them cope with stresses in the banking sector caused by the European debt crisis.
The measures are aimed at preventing a Lehman Brothers-style market meltdown if the debt crisis in Europe spins further out of control.
Yesterday the Bank said it was creating a new facility to make sure UK banks would have no problem gaining access to sterling if the "interbank" market shut down.
In 2008, interbank lending shut down when panic stricken banks refused to lend to each other after Lehman Brothers bank collapsed leaving its debts to other lenders unpaid.
Yesterday's measures are the latest sign that Bank of England governor Mervyn King is preparing for the worst if European leaders cannot convince the markets that the euro area is able to deal with its debt crisis.
It comes just days after the Bank of England teamed up with the US Federal Reserve and the European Central Bank to boost the global supply of dollars, and also to head off a so-called 'liquidity squeeze' that happens when financially sound banks are threatened with collapse because they cannot access short-term funds.
The latest Bank of England measure is called the Extended Collateral Term Repo (ECTR) facility. Banks will be able to go to the facility to borrow sterling for 30 days on an ad hoc basis.
The Bank of England said there was no reason for banks to use the facility yet.
"There is currently no shortage of short-term sterling liquidity in the market," the bank said in a statement.
"But should that position change, the new facility gives the bank additional flexibility to offer sterling liquidity in an auction format against the widest range of collateral."
Government bonds, residential mortgage books, securitised credit-card debt, student and consumer loans, and some types of asset-backed commercial paper can be used as security for the new loans.