Britain won European Union regulatory approval Tuesday to guarantee up to Â£50 billion of banks' bad assets, part of the government's program urging banks to step up lending.
Neelie Kroes, the EU's antitrust chief, said she was satisfied that the program would help reactivate the collapsed market for securities based on British home loans and restore lower-cost mortgages for British borrowers.
The European Commission must check that large state subsidies don't trigger competition problems. It said current conditions on financial markets justified the state aid.
The British government will insure the securities that have slid sharply in value and currently find few buyers in order to restore confidence in the complex investments, often dubbed "toxic assets" because they have punched huge holes in banks' balance sheets.
It will only buy bonds that have been issued by holding companies sponsored by British banks and building societies with substantial business in Britain. The purchase program will run for six months.
The British Treasury has been negotiating with Royal Bank of Scotland and Lloyds Banking Group, both partly nationalized, on terms for participating in the program. News reports suggest that the two banks may have up to Â£500b. in shaky assets that they may wish to insure. Barclays also is reportedly interested in the program.
Securities based on British residential mortgages are the second largest such market in the world, overshadowed only by securities based on US home loans.