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Britain’s biggest banks believe the Bank of England’s emergency lending scheme will eventually have to pay out at least £100bn, or double the £50bn aid package initially proposed if it is to have a significant effect.

The Bank of England confirmed that it would exchange banks’ illiquid securities backed by mortgages and credit cards for ultra-safe Government bonds that lenders can use to raise cash.

Barclays, Lloyds TSB, Royal Bank of Scotland, HBOS and Abbey all said they would use the facility. Analysts said they expected all banks to swap their assets to take advantage of the longer-term funds on offer.

Industry sources said the swaps could reach £100bn or more because the gross mortgage market alone is worth £370bn. The asset swaps will be for one year and can be rolled over for a further two years. To protect the taxpayer, lenders will have to give up assets worth more than the Government bonds they are swapped for, and the risks of losses on the loans will stay with the banks. If the value of the assets falls, banks would have to provide more assets or return some Treasury bills.

The scheme is a one-off operation. Banks will have six months, starting yesterday, to take up the swap offer. In October 2011, the assets will be swapped back and the scheme will close.

The Bank will not report on whether the facility has been used until the scheme is closed, reducing the chances of individual banks being singled out and stigmatised. Barclays caused concern last year when it emerged that it twice used the Bank’s overnight facility, a move that would have gone unnoticed before the credit crunch.

Bank shares fell yesterday, partly amid concern about the “haircuts” that lenders would take in swapping assets at a discount and also because of concern about further rights issues.

The Chief European and UK economist at Global Insight, said: “For the scheme to have the maximum beneficial impact, several other developments really need to happen in tandem. These include greater transparency from banks on their losses and exposures to the sub-prime crisis, steps by the banks to improve their balance sheets … and a commitment by banks to quickly reflect any fall in market interest rates in their products and loan rates to customers.”

Lenders warned that there would be no quick relief for bank customers because it would take time for the benefits of the new liquidity to feed through the system. In the meantime, the cost of borrowing could continue to rise, they said. The three-month sterling interbank rate fell marginally to 5.885 – still way above the Bank’s 5 per cent base rate.

The warning was underlined by Abbey, which said yesterday that it was pulling out of the buy-to-let mortgage market and raising the cost of some of its fixed-rate loans.

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No one is really sure whether Brown and Darling really believe, as they keep saying, that Britain is best placed of most western nations to weather the economic storms or if they are just saying it because they have to. Either way they are wrong, very wrong.

There are two vulnerabilities that point to a recession more severe than elsewhere. The first is the importance of financial services to the UK economy, not just in London but in other centres such as Edinburgh. The lack of trust that is manifest in the risk premiums required in the inter-bank market is bound to chill activity. As finance dries up, merger activity is stalling. Investors are paying down debt, not gearing up. Fear has taken over from greed, and jobs are going fast across the City.

In turn, the difficulty of interbank funding means mortgage packages are being withdrawn, particularly by smaller institutions. Far more cautious lending criteria (loan to value ratios and loan to income ratios) are being applied. The big lenders are less affected – there is a flight to safety in scale – but they will not pick up the baton from all the Northern Rocks that were growing so strongly. As a result, the housing market has turned. This will dominate consumer sentiment for years.

The housing market is like any other asset market: when prices rise, people think they will go on rising. When prices fall, they may hold out of the market until the decline is done. No one wants to buy when it may be even cheaper tomorrow, and particularly when prices are so much higher than historical relationships would suggest. The average house price to income ratio is more than 40% above its long-run average, and nearly double the last low.

Moreover, this inflation of asset prices has been built on an extraordinary accumulation of personal debt. The international comparisons are not favourable: in the UK, personal debt was 164% of disposable income at the end of 2006 compared with 138% in the US, and 104% in Germany. Ministers argue that debt levels are more sustainable because interest rates and inflation are low and employment is stable.

These points are less reassuring than they look. First, debt service – taking both interest and capital repayments – compared to income is nearly as high as it was in 1990. So low interest rates have merely allowed more gearing, leaving just as much vulnerability. Second, employment and even more unemployment are lagging indicators and may prove unstable faced with declining demand as consumer confidence slips. Unemployment rocketed from 6.9% of the labour force in 1990 to 10.5% by 1993.

The one important factor that may sustain activity is the decline in the pound, down by 12% overall in a little more than a year, which will boost manufacturing even though it will not prove much help to financial or other services. However, it means the North and Midlands may weather the storm better than London and the south-east, just as they did in 1990-1992. Moreover, the house price cum consumer confidence recession will hit middle-class southern voters hard.

In the past, it has proved sensible for governments to stop digging when the recession begins. They should take the hit on their own finances and balance sheet, because they are one of the few institutions capable of doing so. There is not, though, much point in trying to fine-tune activity with deliberate tax cuts or spending increases. The evidence is that they usually take effect after the event when they supercharge the recovery.

The one set of policy measures that might make sense are those that stop a freefall in the housing market. Instead of repossessions as borrowers fail to pay, which are then sold into a falling market and make it worse, lenders could take a broader view of equity sharing and payment holidays. With the regulators’ connivance, fire sales could be cut sharply. But with consumer confidence and asset price recessions, the best solution is always not to start from a boom. They end in tears.