The measure was included in a "long list" of initiatives put forward by chancellor Alistair Darling before the markets opened on Monday (January 19th).
Under his proposals, the government will agree projected losses from bad debts with individual banks before selling them insurance against around 90 per cent of it, the BBC reports.
It adds that because the markets for many of these toxic assets have collapsed, banks are finding it hard to accurately value them and therefore cannot asses how much money they are capable of lending.
By insuring banks against further losses, the government hopes to stimulate lending to both individuals and companies.
The chancellor told the BBC that banks taking out the insurance would be under "legally binding agreements to lend more money".
According to the Financial Times, the new bailout was developed after "intense discussions" between the prime minister, cabinet members and executives from the banking industry.