It is designed to get more funds to banks hit by the credit crunch and cautious about interbank loans.

'Creative solutions'

Last week the Federal Reserve said it was making $200 billion available to US financial institutions in a bid to boost the struggling US financial system.

"The Fed is now getting creative with solutions to the credit crunch," said Andrew Busch, an analyst at BMO Capital Markets.

"The market can now provide to the Fed the stuff that they don't want ... [such as federal agency mortgage-backed securities] ... for the stuff they want [US Treasury securities]."

Stephen Gallagher, an economist at Societe Generale, a French bank, said the move was aimed at helping banks stuck with mortgage securities that could not easily be traded.

The moves offer "liquidity to the mortgage security sector while limiting the overall amount of reserves in the banking system to maintain the federal funds rate target," Gallagher said.

Swap agreement

The Federal Reserve also said it had authorised increases in existing programmes called "swap lines'' with the European Central Bank and the Swiss National Bank

"These arrangements will now provide dollars in amounts of up to $30 billion and $6 billion to the ECB and the SNB respectively," the Fed said in statement.

US banks reported losses of tens of billions of dollars after offering high-interest loans that borrowers were later unable to repay.
 
The crisis has also affected international lenders, who bought into or offered subprime loans in the US and then contributed to bouts of chaos on international financial markets.