Bank of England to unveil £50bn rescue package

The Bank of England is set to unveil a rescue package of around £50bn to shore up the UK's fragile banking system, while Royal Bank of Scotland, the country's second-biggest bank, will ask shareholders for around £10bn of new money as it discloses even more writedowns from the sub-prime fiasco.

The Bank's Governor, Mervyn King, has finalised details of the emergency plans, which have been worked on together with the UK's biggest banks and the Treasury. In an unprecedented move, the Bank's intervention will involve it taking over mortgage loans held by the banks on their balance sheets and swapping them for new government bonds. The bonds are likely to have a maturity of a year and be rolled over for three.

By swapping illiquid assets for liquid assets, the Bank hopes it will break the paralysis in the money markets, which has meant that banks have not been lending to each other.

The Bank wants to free up the mortgage securities that are held on the banks' balance sheets, which are untradeable at the moment.

A source said: "The deal will ensure that the credit risk stays with the banks. What is happening is that UK plc is issuing new bonds to the banks and in return it is taking its housing stock on to its books. But it is neutral, and should not involve any taxpayers' money."

The Bank's emergency measures come as Royal Bank of Scotland brings forward news of its rights issue to bolster its own capital reserves. RBS confirmed that it would be making a trading and capital statement on Wednesday but would not comment on rumours of a cash-call.

City sources suggest that RBS could tell investors that it is writing off an additional £4bn in assets on the back of sub-prime losses, after earlier telling shareholders that it had largely avoided most of the fallout from the crisis.

Details regarding the potential sell-off of some non-core assets, including its Direct Line insurance brand, could also be revealed.

Shares in RBS closed up at 384p on Friday, indicating that it has talked to investors about its plans for a rights issue.

RBS is once again being advised by Merrill Lynch, which successfully raised more than £3bn from a preference issue for the Edinburgh-based bank in September last year.

Other banks, such as Barclays and HBOS, are said to be considering similar cash- calls. Analysts say Barclays, which denied any plans for a cash-call, needs about £6bn of new capital, while HBOS is said to need about £2.5bn.

Bradford & Bingley, the mortgage bank that last week denied it was planning a rights issue, could still be forced into a fundraising some time soon.

The RBS move represents a massive U-turn by Sir Fred Goodwin, RBS's chief executive, who has persistently told shareholders that the bank would not seek additional funds from its investors.

Shareholders in RBS have seen the value of their shares fall by more than half over the past few months as a combination of the credit crunch and the bank's decision to buy the ailing Dutch bank ABN Amro have taken their toll.

Sir Fred is likely to face some tough questioning when details of the rights issue emerge this week, with a number of leading shareholders questioning whether his position can remain tenable.

The head of Sir Tom McKillop, the former chief executive of AstraZeneca who now chairs RBS, is also thought to be on the block.

RBS is expected to hold a board meeting this weekend to thrash out final details of the rights issue, which, along with Merrills, is being underwritten by UBS and Goldman Sachs.